The Intelligent
REIT Investor
HOW TO BUILD WEALTH WITH
REAL ESTATE INVESTMENT TRUSTS
Stephanie Krewson-Kelly
R. Brad Thomas
Copyright © 2016 by Stephanie Krewson-Kelly. All rights reserved.
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10 9 8 7 6 5 4 3 2 1
To William,
so that someday you understand
why Mommy
turned the dining room
into “an office” for a year
Contents
Foreword
xi
Preface
xv
Acknowledgments
xix
About the Author
xxi
Part I An Introduction to REITs
1
Chapter 1
3
Chapter 2
What Is a REIT?
Size of the REIT Industry
Categories of REITs
Equity REITs
Mortgage REITs
Classification by Property Type
Size and Index Inclusion
Geographic Focus
Growth Strategy
Where to Find Information on REITs
FTSE NAREIT All REITs Index
Company-Specific Websites
Indexes for Tracking REIT Performance
Exchange-Traded Funds for Investing in REITs
4
4
4
6
7
7
9
12
15
15
15
15
17
Why Invest in REITs?
19
Double-Digit Total Returns
Dividends
Liquidity
Portfolio Diversification
Hedge Against Inflation
Transparent Corporate Structures
19
20
20
21
23
25
v
vi
Contents
Chapter 3
Chapter 4
Chapter 5
REIT Dividends
27
Rockland REIT
REIT Yields
Are REIT Yields Safe?
Quantifying Dividend Safety
Dividend/FFO Payout Ratio
Debt Ultimately Determines Dividend Safety
Debt-to–Total Market Capitalization Ratio
Debt-to–Gross Book Value Ratio
Legal Standing of Leases Supports
Dividend Safety
REIT Dividends and Taxation
REITs Do Not Pay Out All of Their Cash
in Dividends
The Components of a REIT’s Common Dividend
REIT Dividends and the Bush Tax Cuts
Preferred Stock Dividends
Preferred Stock Basics
Risks to Owning Preferred Shares
Conclusion
27
27
30
31
31
32
32
32
35
36
39
40
40
40
42
33
34
Leases
43
Lease Terminology
The Four Major Types of Leases
Leases and Tenant Bankruptcy
FASB and the New Standard for Accounting
for Leases
Lease Duration and REIT Stock Price
Performance
44
48
51
REITs by Property Type
55
Diversified and Specialized REITs
REITs that use Triple-Net-Leases
Risks and Rewards of REITs That Use
Triple-Net Leases
Health-Care REITs
Risks and Rewards of Health-care REITs
Industrial REITs
Risks and Rewards of Industrial REITs
Lease Terms
55
56
52
52
59
59
61
62
63
63
Contents
Lodging/Resort REITs
Hotel Revenue
Hotel Expenses
Technical Aspects Specific to Hotel REITs
Risks and Rewards of Hotel REITs
Mortgage REITs
Risks and Rewards of Mortgage REITs
Office REITs
Lease Terms
Risks and Rewards of Office REITs
Residential REITs
Apartment REITs
Manufactured Housing REITs
Single-Family-Home REITs
Retail REITs
Shopping Center REITs
Mall REITs
Freestanding Retail REITs
Risks and Rewards of Retail REITs
Self-Storage REITs
Risks and Rewards of Self-Storage REITs
Conclusion
vii
63
64
64
64
66
66
69
70
72
72
73
73
75
76
77
77
79
80
81
82
82
83
Part II Investing in REITs
85
Chapter 6
Getting Technical
87
REIT Structures
UPREITs
OP Units
OP Units and Estate Planning
DownREITs
Publicly Traded, Public Nonlisted,
and Private REITs
Volatility versus Liquidity
Transparency and Corporate Governance
Costs and Fees
Externally Advised and Externally Managed REITs
Qualifying as a REIT
REITs Are Not Limited Partnerships
87
88
89
90
91
92
92
92
95
95
96
98
viii
Contents
Chapter 7
Chapter 8
REIT Performance
99
Historical Total Returns
Factors Influencing Demand for REIT Shares
Events That Increased Demand for REIT Shares
REITs versus the Attractiveness of Other
Investments (Lessons from History)
Growth Stocks versus REITs, 1998–1999
Treasury Yield versus REITs, 2004–2006
Safety and Yield, and the Big League
of Benchmarks, 2000–2006
REITs During the Financial Crisis of 2007–2008
Company Attributes That Affect Performance
Real Estate Fundamentals and REIT Performance
Performance by Property Type
How Lease Length and Structure Affect
REIT Returns
Weighted Average Cost of Capital and REIT
Performance
Debt as a Four-Letter Word
Competitive Advantage or Disadvantage—Why
Cost of Capital Matters
REIT Performance in a Rising Interest
Rate Environment
Conclusion
99
101
102
129
131
Analyzing REITs
133
Operating Metrics
Net Operating Income (NOI)
Same-Store (Organic) Earnings
‘Earnings Growth‘ for REITs Is ‘FFO Growth‘
Management’s Track Record as a Screening Tool
Profitability Metrics
Funds from Operation
Adjusted Funds from Operations (AFFO)
Cash Available for Distribution (CAD)
Balance Sheet Metrics and Analysis
Leverage
Debt-to–Total Market Capitalization Ratio
Debt-to–Gross Book Value Ratio
Debt-to-EBITDA Ratio
Weighted Average Cost of Capital (WACC)
134
134
134
135
136
137
137
139
140
140
140
141
142
142
143
108
108
109
110
111
113
113
116
122
127
127
127
Contents
Valuation Metrics
Price/Earnings Multiple
PEG Ratios
Dividend Yield
Dividend Safety
Dividend Coverage, or Payout Ratios
Dividend Discount Model
Net Asset Valuation (NAV)
Implied Capitalization Rate
Conclusion
Appendix A
ix
145
145
145
146
147
147
148
149
158
161
REITs Listed Alphabetically
by Company Name
167
REITs Listed Alphabetically
by Ticker Symbol
175
Appendix C
REITs by Sector
182
Appendix D
REITs with Credit Ratings
193
Appendix B
Glossary
199
Index
209
Foreword
T
he ability to understand the characteristics and value of an
asset when others do not is often the key to investment success.
For my entire professional life, REITs have been one of the most
misunderstood investments. Early on, real estate experts called them
stock, and stock market investors called them real estate. As a result,
they found no natural home in diversified portfolios. Although that
has changed dramatically over the years, there are still many poorly
understood aspects of this asset class. That is why this book is such
an important resource.
For much of the post-1974 period, the term REITs was associated
with the mortgage REIT debacle that preceded it. Financial institutions had offloaded mortgage businesses onto this new vehicle
and the combination of an economic recession and soaring interest
rates precipitated bankruptcies and substantial investor losses.
Somehow, the public had a lot of trouble getting over this—it’s as
if there was no statute of limitations on the damage done in this
period. Periodically, investor appetite for current yield irrespective
of risk allowed the mortgage REIT to resurface in subsequent cycles,
often with similarly disappointing results. Throughout, as Stephanie
Krewson-Kelly demonstrates, equity REITs—that is, property owners
as opposed to lenders—have delivered consistent and superior
investment performance.
The modern publicly traded equity REIT is, quite simply, the
purest form of corporate and property ownership. Professional
management is employed by shareholders and subject to
performance-based compensation. There is strong corporate
governance. Portfolio decisions are made with a long-term perspective and not with an arbitrary internal rate of return objective that
is used to determine a promoter’s compensation. The company has
the ability to employ nearly every type of equity and debt financing.
And the company pays no taxes; pretax profits of the enterprise are
entirely distributed to its shareholders in direct proportion to their
ownership stakes.
xi
xii
Foreword
The importance of this book is that it gives the reader the tools
required to properly analyze and evaluate property companies.
I often advise investors that they should look at the numbers before
they look at the pictures. This book tells you how.
The industry was not always as resilient as it is today. Over the
years there were issues with respect to conflicts of interest, high
expenses, poor balance sheet management, and lack of clarity of
company strategy. (I should add that this, sadly, is still the case
with many private or nontraded REITs.) But the natural selection
process has been in full force in the industry. Evolution has favored
companies that adhered to best practices and became industry
leaders, producing excellent returns to investors and earning a
place as components of all major indexes. This was also the result
of an army of dedicated and professional investors and analysts
following these enterprises. So-called corporate activism, whereby
a small group of investors challenge management and directors or
attempt to affect the liquidation or sale of a company, is not new
to the REIT industry. As far back at the late 1970s astute investors
seeing share prices that did not reflect underlying values were very
effective at producing change.
Despite such progress, there remain a great number of
misconceptions about the nature and behavior of equity REITs.
For example, many believe that share price performance is directly
related to the level and direction of interest rates. Empirical
evidence of this is lacking. In fact, it is the economy that most
strongly influences property and REIT fundamentals and, when
rising interest rates accompany a robust economy, REITs perform
exceptionally well. Many direct real estate investors complain that
the volatility of this publicly traded asset class makes it an inferior
investment to that which doesn’t trade at all. Being long-term
investors, they are happy to sit on their asset until there is a final
outcome—that is, sale. It could be argued that if one is truly a
long-term investor, day-to-day volatility should be ignored, unless it
presents an occasional compelling trading opportunity.
The Intelligent REIT Investor will help you understand and appreciate the newest innovations and developments in the REIT industry.
The most important is the rise in popularity of exchange-traded
vehicles that provide broad diversification and liquidity. Although
many active managers are capable of outperforming popular
indexes, the low expense ratios and tax efficiency of ETFs make
Foreword
xiii
them a compelling choice—so much so that they are experiencing
greater capital inflows than actively managed real estate mutual
funds. Also new are REITs that own formerly uninvestable assets
such as single-family homes, an outgrowth of the housing crisis.
Here, as it has in the past, the public market has filled a capital void,
providing an opportunity to investors.
There are more positive developments in the REIT industry
on the horizon. Rules governing the taxation of foreign owners of
U.S. assets have been relaxed. Already, REITs are extremely popular
among Japanese investors and this interest is quickly spreading to
other parts of Asia. In 2016 real estate has been given its own sector
in the Global Industry Classification Standard (GICS). Formerly
part of the Financial sector, this separation significantly raises the
profile of the asset class.
Publicly traded real estate companies have become a cornerstone
of investment portfolios. I trust that this new edition will provide the
reader the tools required to find appreciation of, and profit from,
this asset class.
Martin Cohen
April 2016
Preface
O
ver the 15-year period that ended on December 31, 2015,
Real Estate Investment Trusts (REITs) were the best performing
investments, delivering annualized total returns of 11.1 percent. By
contrast, the S&P 500 and NASDAQ Indexes achieved annualized
total returns of only 5.0 percent and 4.8 percent, respectively, over
that same time period. Yet many investors are unfamiliar with equity
REITs—companies that own commercial property, such as office
buildings or apartments—or with mortgage REITs, which invest in
real estate–based loans.
In 2016, the REIT industry will experience a watershed event
that will likely increase demand for REIT shares dramatically:
Standard & Poor’s Dow Jones Indices (S&P) and MSCI Inc. (MSCI)
will create a new Global Industry Classification Standard (GICS)
sector called Real Estate. S&P is a leading provider of financial market
indexes and, historically, has classified REITs as part of the Financials
sector. MSCI is a leading provider of investment-decision-support
tools. Together, the organizations determined that investors’ view
of real estate has evolved such that it is regarded as a distinct asset
class—one that is different from banks and financial institutions.
Accordingly, after the market’s close on August 31, 2016, publicly
traded equity REITs and other listed real estate companies will be
removed from Financials and be promoted into their own GICS
code. (Note that mortgage REITs will remain in S&P’s Financials
sector.) The creation of the Real Estate GICS sector should elevate
investor awareness of REITs and broaden the industry’s appeal to
individuals and institutions alike.
The Intelligent REIT Investor conveys essential information about
REITs in a concise, easy-to-understand format. Even novice investors
can gain a thorough understanding of the REIT market by reading
the relevant industry background and simple examples presented in
these pages. Part I, An Introduction to REITs, presents basic information that will help investors quickly gain an understanding of what
xv
xvi
Preface
REITs are in order to have more informed conversations with their
financial advisors. Part II, Investing in REITs, is more technical in
nature, with content geared for individuals who want to analyze and
evaluate specific REITs before investing in them. The Intelligent REIT
Investor is a steppingstone that provides critical information about
the REIT industry and individual companies and, in sharp contrast
to other REIT books, can be read cover-to-cover in less than a day.
Here are a few industry background facts to get started:
• The REIT industry’s aggregate equity market capitalization
has increased exponentially from a mere $8.7 billion at the
beginning of 1990 to its December 31, 2015, level of $939
billion, for a compounded annual growth rate of 34 percent
(see Table 1.1).
• Innovations to the REIT structure that eliminated conflicts of
interest between management and shareholders helped fuel
the industry’s explosive growth. Perhaps the most significant
event in modern REIT history occurred in October 2001,
when the first equity REIT was added to the S&P 500 Index.
Since then, REIT shares have attracted an increasingly broader
array of investors, including general money managers, pension funds, hedge funds, and individual investors. As a result,
the average daily trading volume for REITs increased from
approximately 16 million shares in 2000 to 175 million shares
a day in 2015, according to S&P Global Market Intelligence.
• Despite the industry’s outperformance and the upcoming
creation of the Real Estate GICS sector, most investor portfolios are under-allocated to real estate securities. The 2015
Institutional Real Estate Allocations Monitor, published by Cornell
University’s Baker Program in Real Estate and Hodes Weill
& Associates LP, found the average institutional portfolio
contains an 8.5 percent investment in real estate versus their
targeted investment level of 9.56 percent. REITs are viewed as
an established investment class, and demand for REIT shares
has increased by multiples since 2000—but they are not yet
mainstream.
• Just as the demand for REITs has increased, the marketplace
for REIT shares has also evolved dramatically. As previously
mentioned, the average daily trading volume for component
companies in the FTSE NAREIT All REITs Index, which at
Preface
xvii
December 31, 2015, tracked 223 publicly traded REITs, has
increased exponentially. By dollar volume, the average daily
trading volume of companies in the FTSE NAREIT All REITs
Index increased from $400 million in 2000 to $6.2 billion in
2015 (source: NAREIT).
• In addition to higher trading volume, REIT volatility also has
increased dramatically. The MSCI® US REIT Index (ticker
symbol: RMZ) is an index that tracks approximately 150 publicly traded equity REITs. According to S&P Global Market
Intelligence, during the 1,508 trading days in the 2000–2005
period, the RMZ rose or fell by more than 3 percent only
13 times; in the 1,508 trading sessions of 2010–2015, the RMZ
saw 51 such daily swings. With greater volatility comes greater
risk, but also greater potential returns.
As a final observation, given the industry’s rapid growth in the
last 15 years, it is surprising that basic information about REITs is not
easy to find. Even something as simple as a complete listing of publicly traded companies in the REIT industry is difficult or expensive
to obtain, as each brokerage firm typically has access only to information about the REITs actively covered by their research department’s
analysts (the individuals who analyze and rate stocks as buy, hold, or
sell). To remedy this information gap, the appendices of this book list
the 223 REITs that comprised the FTSE NAREIT All REITs Index at
the end of 2015, as well as some basic information about each company. The following chapters present information in a progressive
manner. Read as much or as little as you require, and welcome to the
world of REITs.
Note: Unless noted otherwise, all prices, total returns, and data used in
this book are as of December 31, 2015.
Acknowledgments
S
incere thanks to the following individuals and organizations for
their permission to reproduce select material and for the time they
invested in editing this book’s more technical content:
• Paul Reeder at S&P Global Market Intelligence (formerly SNL
Financial)
• Matthew Bechard, John Barwick, John D. Worth, Ph.D.,
Christopher T. Drula, and Kurt Walten at the National
Association of Real Estate Investment Trusts (NAREIT)
• Cohen & Steers, Inc. (NYSE: CNS)
• Green Street Advisors
At the risk of omitting someone, I would also like to thank
numerous colleagues at Corporate Office Properties Trust (NYSE:
OFC), the executives at Pebblebrook Hotel Trust (NYSE: PEB), and
Andrew T. DiZio at Sterling Capital Management for their technical
readings of select chapters.
Sincere thanks to R. Brad Thomas for discovering my prior book
and realizing its potential.
A very special thanks to Ralph L. Block, author of Investing
in REITs. His work and writings have inspired and influenced
countless investors and REIT industry veterans, including myself
and Brad Thomas. We both thank him for his love of real estate and
generosity of spirit to educate a still young industry.
Last but never least, I want to thank my family and friends for
their support and patience during the many months it took to
compose this work.
xix
About the Author
S
tephanie Krewson-Kelly is head of investor relations at
Corporate Office Properties Trust (NYSE: OFC), a publicly traded
office REIT. Her experience in the REIT industry dates back to
1994 and includes work as a senior associate in investment banking
(1994–1997) and as a research analyst (1997–2009) in New York City
at Salomon Smith Barney (which today is part of Citi Global Markets)
and J.P. Morgan, followed by five years as the head of REIT research
at BB&T Capital Markets in Richmond, Virginia. In between retiring
from Wall Street and joining her current firm, Ms. Krewson-Kelly
authored REIT Roadmap: An Insiders Guide to Successful Investing in
Real Estate Investment Trusts (second edition published in 2012 under
her maiden name, Krewson; now out of print).
Prior to her career in REITs, Ms. Krewson-Kelly worked as an
internal auditor for a global corporation headquartered in Paris,
France. In 1992, Ms. Krewson-Kelly graduated from the University
of Pennsylvania’s College of Arts & Sciences and Wharton School
of Business, where she earned her respective BA in English and BS
in Economics.
Ms. Krewson-Kelly also authored 4-Leaf Clovers (Cedar Tree
Books, 2015), a new and original children’s book that explains why
the finder of a four-leaf clover gets one wish.
Brad Thomas has over 25 years of experience in commercial
real estate. He is currently the senior analyst for iREIT Forbes and
the editor of the Forbes Real Estate Investor (monthly subscriptionbased newsletter).
He is an active real estate analyst and business journalist for both
Seeking Alpha and Forbes.com where he has a combined following
of over 27,000. He has consistently been ranked as the number-one
REIT and finance analyst on Seeking Alpha and in 2014 he was
ranked by TipRanks as the number-one analyst on Seeking Alpha.
xxi
xxii
About the Author
Thomas has also written articles or has been featured in
Forbes magazine, Kiplinger’s, US News & World Report, Money, NPR,
Institutional Investor, GlobeStreet, The Motley Fool, The Street,
Investopedia, and Fox, CNN, and Fox Business.
Over the last five years Thomas has written over 1,500 articles that
have generated over 7.5 million annual page views. In 2015 his articles generated 3 million annual page views and on Seeking Alpha he
authored over 280 articles, of which 75 percent were Editor’s Picks.
Thomas considers himself a value investor and much like Warren
Buffett, his investment strategies are rooted in the same margin-ofsafety principles taught by the legendary investor, Benjamin Graham.
Thomas considers fundamental research to be the key to intelligent investing, and in the words of Ben Graham, “You are neither
right nor wrong because the crowd disagrees. You are right because
the data and reasoning are right.”
Thomas received a bachelor of science degree in business from
Presbyterian College and he resides in South Carolina with his wife
and children.
Part I
An Introduction to REITs
Part I of this book begins with very basic information that will be
helpful to individuals with little or no prior knowledge of REITs.
Chapter 1 addresses industry size, the different ways REITs are classified, and on-line resources for learning more about the industry
and individual companies. Chapter 2 provides an overview of the
benefits of investing in REITs. Chapter 3 discusses REIT dividends
in great detail, in terms of yield, ways to quickly assess if a dividend
is safe, and how dividends generally are taxed at the investor level.
Chapter 4 provides an overview of different lease structures used by
the REITs that own various property types, followed by a discussion
of the REIT property sectors and subsectors tracked by NAREIT in
Chapter 5. This includes the “major food groups” of office, industrial,
retail, residential, and hotel properties, as well as specialized assets,
such as data centers and timber.
1
1
C H A P T E R
What Is a REIT?
A
real estate investment trust (REIT, pronounced “reet”) is an
entity that receives revenue through owning or financing incomeproducing property. Similar to other industries, REITs can be private
organizations or they can be publicly traded on a stock exchange.
(Chapter 6 discusses the benefits of publicly traded REITs versus private or nontraded REITs.) By being public, REITs are accessible to
investors of all types, who can benefit from receiving real estate income
without purchasing, managing, or financing property directly.
Publicly traded REITs can be bought or sold like the stock of any
other public company. Unique to REITs, however, is their tax status.
The Real Estate Investment Trust Act of 1960 legislation that created
the REIT structure exempts companies that qualify as REITs from
paying corporate income tax, provided they distribute their taxable
income as dividends. To qualify as a REIT in the eyes of the Internal
Revenue Service (IRS), a company must meet many specific criteria.
The most widely known provision is that a REIT must pay shareholders a dividend equal to at least 90 percent of its otherwise taxable
income. (Chapter 6 lists the primary fundamental technical hurdles
companies must clear to qualify for REIT tax status.)
The National Association of Real Estate Investment Trusts
(NAREIT) is the worldwide representative voice for REITs and publicly traded real estate companies with an interest in U.S. real estate
and capital markets. NAREIT’s website, www.reit.com, provides
investors with educational resources, research, and data and index
information, as well as news and information about the industry.
3
4
The Intelligent REIT Investor
Size of the REIT Industry
According to the All REITs Index produced by FTSE NAREIT, there
were 223 publicly traded REITs with a combined public equity market capitalization (or size) of $939 billion on December 31, 2015.
Table 1.1 presents year-end data on the REIT industry’s capitalization
going back to 1971. The market capitalization shown excludes operating partnership (OP) units, which are similar to shares of stock in
the REIT, but which are not publicly traded. (OP units are discussed
in detail in Chapter 6.) Among the 223 publicly traded REITs in the
FTSE NAREIT All REITs Index, 198 were listed on the New York
Stock Exchange (NYSE) and the remaining 25 were listed on either
the National Association of Securities Dealers Automated Quotation
System (NASDAQ) or the American Stock Exchange (AMEX).
Before delving into the benefits of investing in REITs, investors
will find it instructive to understand how different types of REITs
operate.
Categories of REITs
The two broadest categories for REITs—equity and mortgage—are
based on the types of investments they make and the nature of their
revenues. Equity REITs will be included in S&P’s Real Estate GICS
sector effective September 1, 2016; mortgage REITs will remain in
Financials. REITs are also classified by the type of property they
own, such as office or apartment buildings, and by other means
discussed in the following pages. Before buying or selling any stock,
investors should know whether the REIT is an equity REIT or a
mortgage REIT, and what type(s) of property it owns. NAREIT
tracks equity REITs according to property type and mortgage REITs
according to whether their investments are backed by residential or
commercial real estate. Chapter 5 provides additional information
to help investors identify REITs that fit their portfolio objectives.
Equity REITs
Equity REITs derive the majority of their revenue from rents paid
by tenants according to the terms of leases that exist between
the REIT (the landlord or lessor) and its tenants (the lessees).
These REITs usually have fee simple interest in their properties and use
debt to finance a percentage of the purchase price. This investment
What Is a REIT?
5
Table 1.1 Historical REIT Industry Market Capitalization and Total Returns
FN All REITs
FN All Equity REITs
FN Mortgage REITs
Hybrid REITs
Year
# of
EMCa
Total # of
EMCa
Total # of EMCa Total # of EMCa Total
Ended REITs ($MMs) Return REITs ($MMs) Return REITs ($MMs) Return REITs ($MMs) Return
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
34
46
53
53
46
62
69
71
71
75
76
66
59
59
82
96
110
117
120
119
138
142
189
226
219
199
211
210
203
189
182
176
171
193
197
183
152
136
142
153
160
172
202
216
223
∗ Information
$1,494
$1,881
$1,394
$712
$900
$1,308
$1,528
$1,412
$1,754
$2,299
$2,439
$3,299
$4,257
$5,085
$7,674
$9,924
$9,702
$11,435
$11,662
$8,737
$12,968
$15,912
$32,159
$44,306
$57,541
$88,776
$140,534
$138,301
$124,262
$138,715
$154,899
$161,937
$224,212
$307,895
$330,691
$438,071
$312,009
$191,651
$271,199
$389,295
$450,501
$603,415
$670,334
$970,428
$938,852
–
11.2%
−27.2%
−42.2%
36.3%
49.0%
19.1%
−1.6%
30.5%
28.0%
8.6%
31.6%
25.5%
14.8%
5.9%
19.2%
−10.7%
11.4%
−1.8%
−17.4%
35.7%
12.2%
18.6%
0.8%
18.3%
35.8%
18.9%
−18.8%
−6.5%
25.9%
15.5%
5.2%
38.5%
30.4%
8.3%
34.4%
−17.8%
−37.3%
27.5%
27.6%
7.3%
20.1%
3.2%
27.2%
2.3%
12
17
20
19
12
27
32
33
32
35
36
30
26
25
37
45
53
56
56
58
86
89
135
175
178
166
176
173
167
158
151
149
144
153
152
138
118
113
115
126
130
139
161
177
182
$332
$377
$336
$242
$276
$410
$538
$576
$744
$942
$978
$1,071
$1,469
$1,795
$3,270
$4,336
$4,759
$6,142
$6,770
$5,552
$8,786
$11,171
$26,082
$38,812
$49,913
$78,302
$127,825
$126,905
$118,233
$134,431
$147,092
$151,272
$204,800
$275,291
$301,491
$400,741
$288,695
$176,238
$248,355
$358,908
$407,529
$544,415
$608,277
$846,410
$886,488
–
8.0%
−15.5%
−21.4%
19.3%
47.6%
22.4%
10.3%
35.9%
24.4%
6.0%
21.6%
30.6%
20.9%
19.1%
19.2%
−3.6%
13.5%
8.8%
−15.4%
35.7%
14.6%
19.7%
3.2%
15.3%
35.3%
20.3%
−17.5%
−4.6%
26.4%
13.9%
3.8%
37.1%
31.6%
12.2%
35.1%
−15.7%
−37.7%
28.0%
28.0%
8.3%
19.7%
2.9%
28.0%
2.8%
12
18
22
22
22
22
19
19
19
21
21
20
19
20
32
35
38
40
43
43
28
30
32
29
24
20
26
28
26
22
22
20
20
33
37
38
29
20
23
27
30
33
41
39
41
$571
$775
$517
$239
$312
$416
$398
$340
$377
$510
$541
$1,133
$1,460
$1,801
$3,162
$3,626
$3,161
$3,621
$3,536
$2,549
$2,586
$2,773
$3,399
$2,503
$3,395
$4,779
$7,370
$6,481
$4,442
$1,632
$3,991
$7,146
$14,187
$25,964
$23,394
$29,195
$19,054
$14,281
$22,103
$30,387
$42,972
$59,000
$62,057
$61,017
$52,365
–
12.2%
−36.3%
−45.3%
40.8%
51.7%
17.8%
−10.0%
16.6%
16.8%
7.1%
48.6%
16.9%
7.3%
−5.2%
19.2%
−15.7%
7.3%
−15.9%
−18.4%
31.8%
1.9%
14.6%
−24.3%
63.4%
50.9%
3.8%
−29.2%
−33.2%
16.0%
77.3%
31.1%
57.4%
18.4%
−23.2%
19.3%
−42.3%
−31.3%
24.6%
22.6%
−2.4%
19.9%
−2.0%
17.9%
−8.9%
10
11
11
12
12
13
18
19
20
19
19
16
14
14
13
16
19
21
21
18
24
23
22
22
17
13
9
9
10
9
9
7
7
7
8
7
5
3
4
§
§
§
§
§
§
$592
$729
$540
$232
$312
$483
$592
$496
$633
$847
$920
$1,094
$1,329
$1,489
$1,241
$1,962
$1,782
$1,673
$1,356
$636
$1,596
$1,968
$2,678
$2,991
$4,233
$5,696
$5,338
$4,916
$1,588
$2,652
$3,816
$3,519
$5,225
$6,639
$5,807
$8,134
$4,260
$1,133
$741
—
—
—
—
—
—
-11.4%
−23.4%
−52.2%
49.9%
48.2%
17.4%
−7.3%
33.8%
42.5%
12.2%
29.6%
29.9%
17.3%
4.3%
18.8%
−17.6%
6.6%
−12.1%
−28.2%
39.2%
16.6%
21.2%
4.0%
23.0%
29.4%
10.8%
−34.0%
−35.9%
11.6%
50.8%
23.3%
56.2%
23.9%
−10.8%
40.9%
−34.8%
−75.5%
41.3%
—
—
—
—
—
—
prior to 1971 is not available.
discontinued its FTSE NAREIT Hybrid REIT Index in 2010.
a
NAREIT calculates equity market capitalization (EMC) as the year-end share price times the number of
common shares outstanding. The number does not include operating partnership units (OP units), which
are not publicly traded and which are discussed in Chapter 6.
Source: Reproduced by permission of the National Association of Real Estate Investment Trusts® (“NAREIT”) and is used subject to the Terms and Conditions of Use set forth on the NAREIT website, including,
but not limited to, Section 9 thereof.
§ NAREIT
6
The Intelligent REIT Investor
approach is similar to how individuals purchase homes in that the
REIT generally uses some amount of debt and pays the remainder in
cash. Fee simple interest in real estate means the buyer receives title
to the land and improvements, improvements being the building
and any structures that exist on the land. The debt an equity REIT
uses to finance a portion of a property can either be a mortgage
(which is also called property-level debt) or corporate-level bonds
(also called senior or unsecured debt).
Sometimes, equity REITs own properties according to a leasehold
interest, which is also called a ground lease. In this case, the REIT
does not own the land on which the building(s) sit(s). The REIT
pays the landowner (or lessor) a monthly fee for an agreed-upon time
period—usually several decades—in exchange for the right to use
the land as needed to support the building’s operations.
Particularly since the REIT Modernization Act of 1999 (RMA),
equity REITs increasingly operate as fully integrated real estate companies that also derive income from a range of real estate–related
business activities. As of December 31, 2015, 182 of the 223 publicly
traded REITs in the FTSE NAREIT All REITs Index were equity
REITs. These companies had an aggregate equity market capitalization of $886.5 billion (excluding OP units), constituting the
largest category of REITs in the United States. Chapter 5 provides
more detail on equity REITs according to the different types of
commercial properties they own.
Mortgage REITs
Mortgage REITs lend money to real estate owners directly, by
issuing mortgages, or indirectly, by acquiring existing loans or
mortgage-backed securities. Mortgage REITs, which are also
referred to as mREITs, derive the majority of their revenues from
interest received on commercial mortgage loans or from investments
in residential- or commercial-based real estate instruments.
Mortgage REITs are analogous to banks that lend almost exclusively to commercial real estate developers and landlords, except
mREITs do not have customer deposits from which to lend. Instead,
they raise capital by issuing debt and equity in private or public
capital markets. Their revenue comprises the principal and interest
payments received from their investments.
As of December 31, 2015, FTSE NAREIT All REITs Index listed
41 mortgage REITs with a combined equity market capitalization of
What Is a REIT?
7
$52.4 billion (excluding OP units). Since the Dodd–Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act) was signed
into law in July 2010, the number of publicly traded mREITs tracked
by NAREIT has increased 52 percent, from 27 companies at the end
of June 2010 to 41 at the end of 2015. This is because the Dodd-Frank
Act tightened regulation on traditional banks and lenders. Mortgage
REITs essentially stepped in to fill the credit void created by this and
other legislation.
Hybrid REITs
Prior to 2011, there was a third category of REITs, then called hybrid
REITs. These companies combined the ownership strategies of equity
and mortgage REITs, depending on the investment opportunities
available. Historically, hybrid REITs represented the smallest class of
REITs industry and, in December 2010, NAREIT reclassified the four
remaining hybrid REITs as mortgage REITs.
Classification by Property Type
Most often, investors refer to REITs by the type of commercial property in which they invest, such as offices, apartments, or warehouse
buildings. In the past few years, the IRS ruled that rental income
from less traditional property types can also qualify as good income
for REITs. (The concept of good or bad REIT income is addressed
in Chapter 6.) As a result, the industry now includes REITs that own
billboards, cell phone towers—even gas and electric transmission
lines—and other highly specialized real estate. NAREIT classifies
these new comers to the industry as specialty REITs. Chapter 5
discusses the industry’s different property types in greater detail,
and Appendix C provides summary information on the 223 REITs
that were publicly traded at the end of 2015.
Size and Index Inclusion
In describing each classification of REIT, size is one important investment criterion, because companies that are large (as measured by
their equity market capitalization) trade differently than small companies. Chapter 8 details how to calculate a REIT’s equity market
capitalization (also referred to as simply market cap or EMC) and other
important metrics.
8
The Intelligent REIT Investor
An important detail to keep in mind when looking at REIT data
is that, in addition to the shares held by public shareholders, most
REITs also have private, nontraded ownership units called operating
partnership (OP) units outstanding. Specific to REITs, OP units are
similar to shares of common stock in that they represent a percent
ownership in a REIT (see Chapter 6). Generally, OP units can be
exchanged on a one-for-one basis into common stock of the REIT
and receive the same level of common dividend as stock. The
main difference between OP units and stock is that OP units are
not publicly traded (also referred to as not being liquid). Unless
expressly noted otherwise, market capitalizations for REITs that
are available on financial service outlets, such as Yahoo! Finance,
exclude OP units.
One of the reasons why large and small cap REITs trade differently is that larger REITs simply have a greater supply of common
shares available to buy or sell on stock exchanges; the number of
common shares outstanding is also referred to as a company’s float.
Larger-cap REITs with greater float tend to have higher average daily
trading volumes.
Approximately 100 REITs, or less than 50 percent of the industry,
have market capitalizations and daily average trading volume levels
that have qualified them for inclusion in major stock indexes. Index
inclusion is a significant factor in long-term REIT performance. This
is because money managers typically have to allocate money to invest
in stocks that are part of the broader indexes against which they
benchmark. Benchmarking is simply measuring the performance of
an investment strategy against a standard, such as an index. Money
managers may aim to match the performance of their targeted
benchmark(s); others may aim to exceed their benchmarks.
REITs that are included in the S&P 500, 400, or 600 Indexes are
more visible to investors and money managers, and tend to outperform nonindex REITs when REITs are in favor as an investment class.
In contrast, when investors do not want to own REITs, the index
companies often experience disproportionate declines (albeit, temporary) compared to nonindex REITs. (Chapter 7 discusses factors
that affect REIT performance in more detail.)
The 24 large-cap REITs that were included in the S&P 500 Index
at the end of 2015 are listed in Table 1.2. With REITs outperforming
most other asset classes in the last few years, there have been a number of initial public offerings, or IPOs, by small and mid-cap REITs.
What Is a REIT?
9
Table 1.2 REIT Constituents of the S&P 500 Indexa
Company Name (Ticker)
Ticker
Property Focus
Simon Property Group
Public Storage
American Tower Corporation
Equity Residential
Crown Castle International
AvalonBay Communities
General Growth Properties
Welltower, Inc.∗
Prologis, Inc.
Boston Properties
Vornado Realty Trust
Ventas, Inc.
Equinix Inc
HCP, Inc.
Essex Property Trust
Weyerhaeuser Company†
Realty Income Corporation
Macerich Company
Host Hotels & Resorts
SL Green Realty Corp
Kimco Realty Corporation
Plum Creek Timber Company†
Apartment Investment and
Management
Iron Mountain, Inc.
SPG
PSA
AMT
EQR
CCI
AVB
GGP
HCN
PLD
BXP
VNO
VTR
EQIX
HCP
ESS
WY
O
MAC
HST
SLG
KIM
PCL
AIV
Retail—Malls
Self-Storage
Infrastructure—Wireless
Residential—Apartments
Infrastructure—Wireless
Residential—Apartments
Retail—Malls
Health Care
Industrial
Office
Diversified
Health Care
Data Centers
Health Care
Residential—Apartments
Timber
Retail—Free Standing
Retail—Malls
Lodging/Resorts
Office
Retail—Shopping Centers
Timber
Residential—Apartments
IRM
Specialty
Total for all 24 REITs
EMCb
$60.4
42.8
41.0
29.7
28.9
25.2
24.0
23.9
22.5
19.6
18.8
18.7
18.6
17.8
15.7
15.3
12.9
12.7
11.6
11.3
10.9
8.3
6.3
5.7
$502.4
a
In 2016, Extra Space Storage (NYSE: EXR) and UDR, Inc. (NYSE: UDR) will be added to the S&P 500,
becoming the 25th and 26th REITs in this index.
b Equity market caps are in billions of dollars.
∗
Formerly known as Health Care REIT, Inc.
†
These two timber REITs are merging; the transaction is expected to be complete in the first half of 2016.
Source: Reproduced by permission of the National Association of Real Estate Investment Trusts® and is
used subject to the Terms and Conditions of Use set forth on the NAREIT website, but not limited to,
Section 9 thereof.
Although these smaller companies are not as liquid as larger-cap
stocks, they nonetheless can offer strong value for longer-term
investors. The 35 and 32 REITs that, respectively, were included in
the S&P 400 Mid Cap and 600 Small Cap Indexes at the end of 2015
are listed in Tables 1.3 and 1.4.
Geographic Focus
REITs typically own and operate regional or national portfolios
of properties. Investors interested in investing in “the U.S. office
10
The Intelligent REIT Investor
Table 1.3 REIT Constituents of the S&P 400 Mid Cap Index
EMCa
Company Name (Ticker)
Ticker
Property Focus
Extra Space Storage Inc.†
Federal Realty Investment Trust
UDR, Inc. †
Duke Realty Corporation
Mid-America Apartment
Communities, Inc.
Camden Property Trust
Omega Healthcare Investors, Inc.
Alexandria Real Estate Equities,
Inc.
Regency Centers Corporation
Kilroy Realty Corporation
National Retail Properties, Inc.
Lamar Advertising
BioMed Realty Trust, Inc.‡
American Campus Communities,
Inc.
Taubman Centers, Inc.
Liberty Property Trust
Douglas Emmett, Inc.
Weingarten Realty Investors
Highwoods Properties
Hospitality Properties Trust
Sovran Self Storage, Inc.
Senior Housing Properties Trust
Equity One, Inc.
Post Properties, Inc.
Tanger Factory Outlet Centers,
Inc.
Corrections Corporation of
America
LaSalle Hotel Properties
Communications Sales & Leasing
Rayonier Inc.
Care Capital Properties, Inc.
Urban Edge Properties
Mack-Cali Realty Corporation
Corporate Office Properties Trust
WP Glimcher Inc.
Potlatch Corporation
EXR
FRT
UDR
DRE
MAA
Self Storage
Retail—Shopping Centers
Residential—Apartments
Industrial
Residential—Apartments
CPT
OHI
ARE
Residential—Apartments
Health Care
Office
6.6
6.5
6.5
REG
KRC
NNN
LAMR
BMR
ACC
Retail—Shopping Centers
Office
Retail—Free Standing
Specialty—Billboards
Office
Residential—Apartments
6.4
5.8
5.5
4.9
4.8
4.6
TCO
LPT
DEI
WRI
HIW
HPT
SSS
SNH
EQY
PPS
SKT
Retail—Malls
Industrial
Office
Retail—Shopping Centers
Office
Health Care
Self Storage
Health Care
Retail—Shopping Centers
Residential—Apartments
Retail—Shopping Centers
4.6
4.6
4.5
4.3
4.2
4.0
3.8
3.5
3.5
3.2
3.1
CXW
Specialty—Prisons
3.1
LHO
CSAL
RYN
CCP
UE
CLI
OFC
WPG
PCH
Lodging/Resorts
Infrastructure
Timber
Health Care
Retail—Shopping Centers
Office
Office
Retail - Malls
Timber
2.8
2.8
2.7
2.6
2.3
2.1
2.1
2.0
1.2
Total for all 35 REITs
a Equity
$10.9
10.1
9.8
7.3
6.8
$163.8
market caps are in billions of dollars.
2016, Extra Space Storage and UDR, Inc. will be added to the S&P 500 Index.
‡
In January 2016, BioMed Realty Trust (former NYSE: BMR) was taken private.
Source: Reproduced by permission of the National Association of Real Estate Investment Trusts® and is
used subject to the Terms and Conditions of Use set forth on the NAREIT website, including, but not
limited to, Section 9 thereof.
† In
What Is a REIT?
11
Table 1.4 REIT Constituents of the S&P 600 Small Cap Index
Company Name (Ticker)
Ticker
Property Focus
EMCa
EPR Properties
Healthcare Realty Trust
Incorporated
Medical Properties Trust
PS Business Parks
Acadia Realty Trust
Kite Realty Group Trust
GEO Group
Education Realty Trust
Cousins Properties Inc.
DiamondRock Hospitality
Company
Lexington Realty Trust
EastGroup Properties, Inc.
Retail Opportunities Investments
Corp.
CoreSite Realty Corporation
Parkway Properties, Inc.
American Assets Trust, Inc.
LTC Properties, Inc.
Pennsylvania REIT
Chesapeake Lodging Trust
Sabra Health Care REIT, Inc.
Government Properties Income
Trust
Saul Centers, Inc.
Inland Real Estate Corporation†
Franklin Street Properties Corp.
Summit Hotel Properties, Inc.
Capstead Mortgage Corporation
Universal Health Realty Income
Trust
Agree Realty Corporation
Cedar Realty Trust, Inc.
Getty Realty Corp.
Care Trust REIT Inc
Urstadt Biddle Properties
EPR
HR
Specialty—Cineplex
Health Care
$3,493
2,843
MPW
PSB
AKR
KRG
GEO
EDR
CUZ
DRH
Health Care
Industrial
Retail—Shopping Centers
Retail—Shopping Centers
Specialty—Prisons
Residential—Apartments
Office
Lodging/Resorts
2,738
2,354
2,282
2,151
2,144
2,099
2,042
1,937
LXP
EGP
ROIC
Diversified
Industrial
Retail—Shopping Centers
1,888
1,796
1,768
COR
PKY
AAT
LTC
PEI
CHSP
SBRA
GOV
Data Centers
Office
Diversified
Health Care
Retail—Malls
Lodging/Resorts
Health Care
Office
1,738
1,737
1,722
1,533
1,512
1,501
1,318
1,128
BFS
IRC
FSP
INN
CMO
UHT
Retail—Shopping Centers
Retail—Shopping Centers
Office
Lodging/Resorts
Mortgage—Residential
Health Care
1,082
1,068
1,037
1,035
835
665
ADC
CDR
GTY
CTRE
UBA
Retail—Free Standing
Retail—Shopping Centers
Retail—Free Standing
Health Care
Retail—Shopping Centers
642
596
573
527
511
Total for all 32 REITs
a Equity
$50,291
market caps are in millions of dollars.
REIT is in the process of being acquired and will no longer be publicly traded.
Source: Reproduced by permission of the National Association of Real Estate Investment Trusts® and is
used subject to the Terms and Conditions of Use set forth on the NAREIT website, including, but not
limited to, Section 9 thereof.
† This
12
The Intelligent REIT Investor
market” could invest in a REIT, such as Boston Properties, Inc.
(NYSE: BXP), that owns office buildings in major U.S. cities. By
contrast, an investor who wants to capitalize on a rise in demand
for office space in, say, Philadelphia, Pennsylvania, could focus on
stocks such as Brandywine Realty Trust (NYSE: BDN).
Certain larger-cap U.S. REITs have expanded their real estate
holdings outside the United States. Stocks like Prologis (NYSE: PLD)
provide a way for investors to participate in the economics of owning
warehouse/distribution space in the global marketplace. Similarly,
Simon Property Group, Inc. (NYSE: SPG) affords individuals the
opportunity to invest in the company’s globally diversified portfolio
of high-end shopping malls.
Risks and Rewards of Geographic Concentration
There are risks and rewards associated with each REIT’s degree of
geographic concentration and the supply-and-demand characteristics associated with their property markets. Landlords that own
apartment buildings in New York City’s Manhattan market will likely
generate different levels of rent growth, occupancy, and shareholder
returns than apartment landlords in Dallas, Texas. In all cases, the
competency and discipline of a company’s senior management and
property management teams are key determinants of a REIT’s ability
to increase shareholder value, regardless of geography or property
focus. That said, investors who strongly believe one region or
market in the country will experience disproportionately better—or
worse—economic times than the rest of the country can capitalize
on their conviction by investing in (or selling out of) REITs based
on the geographic concentrations of their portfolios.
Growth Strategy
A less common but nonetheless important way of classifying REITs
(at least for investment purposes) is according to the tactics they use
to grow earnings and cash flow. Every REIT can be broken down into
three activities that support their financial results:
1. Internal growth generated by managing assets the REIT
already owns; also sometimes called “organic” growth
2. External growth generated by acquiring or developing
properties
3. Financing that growth through issuing new debt or equity,
and/or by selling properties
What Is a REIT?
13
There is no one “right way” for REITs to grow earnings,
though each company’s cost of capital affects the opportunities on which a management team can capitalize. Chapter 7
discusses cost of capital in more detail, but for purposes of this
chapter, the following rule is sufficient:
Companies with lower costs of capital are able to grow faster and
with higher quality investments than companies with higher, less
competitive costs of capital.
Each REIT’s management team pursues the strategy they
deemed to be optimal for that company’s chosen real estate markets, opportunities, and cost of capital. The following truisms should
assist investors in evaluating individual companies before making an
investment.
Risk Axioms for Growth Strategies:
Developing = More Risk Than Acquiring Properties
Acquiring = More Risk Than Actively Managing Existing
Properties
More Debt = More Risk
• Development—Growing earnings by developing properties is
riskier than acquiring assets that already exist, especially in
property types that take a year or more to construct. The added
risk associated with development is why companies expect to
earn a higher yield, or return, on monies they invest in development. The higher returns compensate the higher risk of
potential failure. Many REITs have been able to execute successful development strategies, however, by being extremely
careful in their selection of location, by achieving some level
of pre-leasing prior to commencing construction, and/or by
operating their business with lower levels of debt. Examples of
such REITs include: Armada Hoffler Properties (NYSE: AHH),
14
The Intelligent REIT Investor
Corporate Office Properties Trust (NYSE: OFC), and the various data center–focused REITs such as Digital Realty Trust
(NYSE: DLR).
• Acquisitions—Acquiring assets bears more risk than managing
properties a REIT already owns. Managing existing assets can
include redeveloping them to reposition them in their markets, which generally is less risky than new acquisitions. When a
REIT buys a property, management underwrites the local trade
area surrounding that asset. If management overestimates the
demand for space in the new market, the acquired property
will underperform expectations. By the same token, if management underestimates the supply outlook for a new market,
and other landlords develop too many competing buildings,
then the acquired property will likely underperform expectations due to the REIT’s difficulty in raising rents to keep pace
with inflation.
• Financing—Regarding how a REIT pays for existing operations
and any level of external growth, it is hard to find a REIT—or
any company—that went bankrupt because it had too little debt.
REITs are like any company in that more debt, which also is
referred to as leverage, equates to higher risk and lower certainty of future earnings and cash flow.
No REIT ever went bankrupt from having too little debt.
At a minimum, the amount of debt a REIT carries can
affect its ability to take advantage of market opportunities.
For example, a REIT that has a debt-to-gross book value ratio
of 40 percent has greater financial flexibility than a REIT with
a 60 percent ratio. (Please refer to Chapter 8 for a definition
of gross book value.) The REIT with lower leverage should be
able to successfully navigate adverse economic times without
lowering its common dividend or selling assets at fire-sale
prices. Low-levered companies should also be able to purchase
strategic, premium-quality assets that distressed sellers may
bring to market during times of economic adversity, such as
during the Great Recession of 2008–2009. Last but definitely
not least, companies with low levels of debt typically can raise
debt and equity capital at lower prices than more highly
leveraged companies.
What Is a REIT?
15
Where to Find Information on REITs
In addition to NAREIT, there are several resources to consult for
additional information on the industry and individual REITs. The
resources detailed below should provide sufficient information for
analyzing the majority of REITs that were publicly traded at the end
of 2015.
FTSE NAREIT All REITs Index
The FTSE Group is a joint venture between the Financial Times
of London and the London Stock Exchange and is the largest
provider of financial indexes in the United Kingdom. The acronym
FTSE is pronounced “footsie” and stands for Financial Times Stock
Exchange.
Appendix A and B provide listings of the 223 REITs that comprised the FTSE NAREIT All REITs Index at December 31, 2015.
Companies are listed alphabetically by their name in Appendix
A and by their stock exchange (or ticker) symbol in Appendix
B. Chapter 5 and Appendix C of this book also list each REIT
according to property focus and present summary information on
each company, including website addresses.
Company-Specific Websites
Once an investor knows which REIT(s) suits his or her investment criteria, each REIT’s website will provide the most complete
and timely information, including press releases, annual reports,
and quarterly statements filed with the Securities and Exchange
Commission (SEC), as well as other useful information.
In December 2015, the Internet Corporation for Assigned
Names and Numbers (or ICANN) designated NAREIT to operate a
dot-REIT top-level domain registry. As more REITs adopt the .REIT
identifier for their websites, searching for companies that are REITs
by using the Internet will become faster and easier. See Appendix C
for the website addresses of the 223 REITs in the FTSE NAREIT All
REITs Index.
Indexes for Tracking REIT Performance
In 1985, Cohen & Steers, Inc. (NYSE: CNS) created the first real
estate mutual fund and, today, is a global investment manager
16
The Intelligent REIT Investor
specializing in liquid real assets, including real estate securities,
listed infrastructure, commodities and natural resource equities, as
well as preferred securities and other income solutions. They offer
two real estate indexes:
• Cohen & Steers Realty Majors Portfolio Index (RMP), which
tracks the largest, most liquid U.S. REITs.
• Cohen & Steers Global Realty Majors index (GRM), which
tracks global real estate securities that stand to lead or benefit most from the securitization of commercial real estate
worldwide.
NAREIT and MSCI, a leading provider of investment-decisionsupport tools, provide indices that track REIT performance:
• MSCI US REIT Index, ticker symbol RMZ on the American
Stock Exchange, is a real-time, price-only index that tracks
approximately 99 percent of the publicly traded equity REITs
in the United States. At the end of 2015, 150 equity REITs
composed the RMZ. Mortgage and certain equity REITs are
not included in this index. Investors can obtain real-time
quotes for the RMZ on financial websites, such as Google
Finance and Yahoo Finance, and can learn more about the
index by going to www.msci.com.
• MSCI also publishes the RMS, a daily total return version of
the RMZ, which encompasses the companies’ dividend yields.
The RMS is not a real-time index; the total return of the REITs
that compose the index is published at the end of the day.
• NAREIT indexes. In conjunction with FTSE, NAREIT publishes several indexes to track U.S. REIT performance; the
three most popular indexes, and the number of companies
that comprised each one at December 31, 2015, are as follows:
1. FTSE NAREIT All REITs Index—tracks publicly traded
equity and mortgage REITs (223 companies)
2. FTSE NAREIT Equity REITs Index—tracks publicly traded
equity REITs (160 companies)
3. FTSE NAREIT Mortgage REITs Index—tracks publicly
traded mortgage REITs (37 companies)
S&P Dow Jones Indices LLC (www.spdji.com), a part of McGraw
Hill Financial, is the world’s largest, global resource for index-based
What Is a REIT?
17
concepts, data, and research. Home to iconic financial market
indicators, such as the S&P 500® and the Dow Jones Industrial
Average® , S&P Dow Jones Indices LLC has over 115 years of
experience constructing innovative and transparent solutions that
fulfill the needs of investors. S&P Dow Jones Indices publishes many
stock market indices, including the Dow Jones Equity All REIT
Index (REI):
• The REI contains all the publicly traded U.S. equity REITs in
the Dow Jones U.S. stock universe, which totaled 177 companies at December 31, 2015.
• The REI is calculated and disseminated every 15 seconds
during the trading day. More information about the Dow
Jones REIT indexes can be found at www.djindexes.com.
Exchange-Traded Funds for Investing in REITs
The indexes in the preceding paragraphs only track and report
REIT performance. Several exchange-traded funds (ETFs) exist that
enable investors to purchase an index (or bundle) of REITs—similar
to buying a mutual fund that approximates the returns of the S&P
500 Index or other broad-based stock market index. There are even
ETFs that will allow investors to short (that is, bet against) a rise in
REIT share prices. Three of the largest REIT ETFs are listed below:
1. VNQ—The Vanguard Group’s REIT exchange-traded fund
that trades under the ticker symbol VNQ is the largest REIT
ETF available and is designed to track the performance of
the MSCI US REIT Index (see RMZ discussion earlier in this
chapter).
2. IYR—iShares U.S. Real Estate ETF investment seeks to
approximate the price and yield performance of an index of
U.S. equities in the real estate sector.
3. ICF—iShares Cohen & Steers REIT ETF seeks to track the
investment results of the largest, most liquid REITs.
For a more complete listing and discussion of real estate ETFs,
Investors should consult with their financial advisors and also review
the ETF Lab provided by Forbes and www.IntelligentREITInvestor
.com.
2
C H A P T E R
Why Invest in REITs?
M
any investors buy REITs solely for the attractive dividend
yields they offer relative to government bonds and other investments. However, there are many more, equally compelling reasons
to include REITs as part of a well-balanced portfolio. Two such
reasons are that REITs typically have delivered total returns that
exceed those of the S&P 500 Index and that their dividends generally increase faster than inflation (as measured by increases in the
Consumer Price Index [CPI]), making REITs an effective hedge
against inflation. A third and equally important reason is that
REITs are a diversification tool; a wealth of research has proven
that investing in REITs helps lower risk and increase returns on a
portfolio of stocks and bonds.
Double-Digit Total Returns
Investor total returns on any stock investment are calculated as
the sum of dividends received plus any appreciation (or less any
declined) in stock price during the time the stock is owned. Due in
part to their attractive current yields, REITs have tended to deliver
annualized total returns to investors of 10 to 12 percent over time.
As shown in Table 2.1, equity REITs delivered average total annual
returns of 12.0 percent from 1972 to 2015—or 170 basis points more
than the 10.3 percent total return achieved by stocks in the S&P 500
Index over the same period. (A basis point [bps] is equal to 1/100
of a percentage point; for example, 1 percent equals 100 bps.)
19
20
The Intelligent REIT Investor
Table 2.1 Comparative Compounded Total Annual Returns
Timeframe*
All REITs
All Equity REITs
S&P 500
NASDAQ†
DJIA
2015
3-Year
5-Year
10-Year
15-Year
20-Year
30-Year
40-Year
1972 – 2015
2.3%
10.3%
11.6%
6.9%
10.8%
10.3%
9.4%
12.0%
9.8%
2.8%
10.6%
11.9%
7.4%
11.1%
10.9%
10.7%
13.7%
12.0%
1.4%
15.1%
12.6%
7.3%
5.0%
8.2%
10.4%
11.4%
10.3%
7.0%
19.8%
14.9%
9.7%
4.8%
8.1%
9.6%
11.0%
8.9%
0.2%
12.7%
11.3%
7.8%
5.8%
8.8%
8.4%
7.8%
7.0%
∗
Compounded annual total returns for the number of years ended December 31, 2015. Shaded areas
represent time periods when equity REITs outperformed the S&P 500 Index.
† Price appreciation only. Compounded annual returns from 1972 to 2015 are calculated from the NASDAQ
Composite’s inception date of December 31, 1973.
Source: Reproduced by permission of the National Association of Real Estate Investment Trusts® and is
used subject to the Terms and Conditions of Use set forth on the NAREIT website, including, but not
limited to, Section 9 thereof.
Dividends
Dividend income is one of the primary reasons to invest in REITs,
in large part because their yields represent an attractive premium to
yields offered by other investments. As of December 31, 2015, the
average dividend yield from REITs in the FTSE NAREIT All REITs
Index was 4.3 percent, or approximately 200 basis points higher than
the 2.3 percent yield on 10-year U.S. Treasuries and the 2.2 percent
yield from the S&P 500 Index.
REITs are an attractive investment for people seeking current
income, provided that the REIT has a conservatively leveraged balance sheet and well-located assets that are competitively managed.
When a REIT possesses these qualities, it generally can sustain—and
preferably grow—the dividend it pays to shareholders. Chapter 3 discusses the characteristics of REIT dividends and dividend yield, as
well as quick calculations investors can perform to assess the sustainability of a REIT’s dividend.
Liquidity
Publicly traded REITs offer investors the ability to add real estate
returns to their portfolios without incurring the liquidity risk that
accompanies direct real estate investment. This is because REITs that
are publicly traded on stock exchanges can be bought or sold in
Why Invest in REITs?
21
an instant, like other stocks, through a financial advisor or online
trading services. (Nontraded and private REITs do not offer similar
liquidity; these structures are discussed in Chapter 6.) In contrast,
direct investments in real estate can take several months or even years
to sell. Publicly traded REITs, therefore, enable investors to participate in real estate–based investments in a liquid manner.
Portfolio Diversification
REITs are a proven diversification tool for portfolio management,
a fact that has been demonstrated in multiple studies by various
prominent investment advisory firms using different techniques,
data sources, and time periods. In simplistic terms, diversification
means that adding a particular investment to a portfolio increases
the overall expected returns of that pool of investments while also
reducing risk. Note that risk is also referred to as volatility.
The reason for this diversification benefit is because real estate
and, by extension, REITs represent one of the three fundamental
investment asset classes, the other two being stocks (also called
equities) and bonds. As Figure 2.1 shows, U.S. investment real estate
(which excludes single-family homes) is estimated to represent
$17 trillion, or 21 percent of the $79 trillion investable assets in the
United States. Because real estate has its own unique drivers and
cycle that are separate from that of other equities and bonds, real
estate investments promote portfolio diversification. (Chapter 7,
REIT Performance, discusses the real estate cycle in detail.)
In the past decade, six major studies have been performed to
determine what allocation to REITs will maximize their diversification benefits. (Allocation speaks to what percent of the total portfolio
amount is invested in an asset class. For example, an individual may
invest 20 percent of his or her portfolio in REITs, 40 percent in equities, and 40 percent in bonds.) Figure 2.2 summarizes their findings.
Fact
A $1,000 portfolio invested in a combination of equities, bonds, and
equity REIT shares will produce greater returns and exhibit less risk
than a $1,000 portfolio that does not include an allocation to equity
REITs.
22
The Intelligent REIT Investor
U.S. Bonds
$35 Trillion
45%
Investment
Real Estate
$17 Trillion
21%
U.S. Equities
$27 Trillion
34%
Figure 2.1 Investment Real Estate Is the Third Largest Asset Class in the
United States.
Source: Reproduced from NAREIT materials by permission of the National Association of Real
Estate Investment Trusts® and is used subject to the Terms and Conditions of Use set forth
on the NAREIT website, including, but not limited to, Section 9 thereof.
Although many investors believe investing (or allocating)
between 5 and 10 percent of their portfolio in REITs is “about right,”
these six studies have shown that the optimal allocation to REITs is
as high as 20 percent—which is proportionate with the size of the
investment real estate market shown in Figure 2.1.
For example, the 2016 Wilshire Associates study commissioned
by NAREIT, The Role of REITs and Listed Real Estate Equities in Target
Date Fund Asset Allocations (the “2016 Wilshire Report,” reference in
Figure 2.2), found that the optimal portfolio allocates up to 17 percent of assets to REITs. The study showed that a diversified portfolio
that included REITs had nine less basis points of risk (and generated
33 basis points of additional return) than a similar portfolio that did
not include REITs. Although 0.33 percent may not seem meaningful
on the surface, over time the additional return adds up.
A portion of this outperformance can be attributed to the robust
dividend yields and above-average returns REITs offer, but an equally
important factor is the low correlation with which REITs trade relative to bonds and other stocks. A correlation of +1 between two
investments means that they trade in complete lockstep with one
another; conversely, a correlation of –1 means they trade proportionally in opposite directions. The 2016 Wilshire Report showed that
from 1975 through 2015, REIT share prices moved with a 0.58 correlation with the Wilshire U.S. Large Cap Index and a 0.65 correlation
with the Wilshire U.S. Small Cap Index.
Why Invest in REITs?
Morningstar Analysis
Morningstar Analysis
Mean Variance Optimization Mean Variance Optimization
1990–2007
1990–2010
21%
Morningstar Analysis
Liability Relative Investing
1990–2009
20%
Wilshire Analysis
Surplus Optimization
1990–2012
20%
18%
23
Morningstar Analysis
Fat Tail Optimization
1990–2009
20%
Wilshire Analysis
Surplus Optimization
1990–2015
17%
Note: Allocations to any asset class will depend on the optimization methodology employed, the time period
covered by the analysis, the assets included in the opportunity set, and the expected return assumptions.
Figure 2.2 Portfolio Allocations to Global Real Estate (different researchers,
methodologies, and time periods)
Source: Reproduced from NAREIT materials by permission of the National Association of Real
Estate Investment Trusts® and is used subject to the Terms and Conditions of Use set forth
on the NAREIT website, including, but not limited to, Section 9 thereof.
As a final note, a groundbreaking study completed recently by
CEM highlighted the advantages of owning publicly traded REITs
rather than private real estate. According to a summary of the CEM
study provided by NAREIT, the study tracked returns from over 200
public and private pension plans with combined assets of over $2.5
trillion. The results, which are summarized in Figure 2.3, clearly
demonstrated that publicly traded REITs had the highest return
(net of expenses), with an annualized total return of 11.31 percent.
Private real estate returned just 7.61 percent.
Hedge Against Inflation
Equity REITs rent their properties to tenants according to leases,
the terms of which tend to protect the REITs’ margins from the
effects of inflation. As discussed in Chapter 4, most leases provide
24
The Intelligent REIT Investor
CEM Study Shows Actual Returns and Fees
For Major Asset Classes, 1998–2011
REITs
Private
Equity
Other
Real
Assets
Private
Real
Estate
Net Return
Hedge
Funds
4.77%
238
BPS
7.61%
51
BPS
9.85%
Fees
Investment costs
in basis points
11.10%
11.31%
Annualized total
return % net of fees
103
BPS
113
BPS
125
BPS
Figure 2.3 CEM Benchmarking Study: U.S. Defined Benefit Pension Plan
Performance
Source: Reproduced from NAREIT materials by permission of the National Association of Real
Estate Investment Trusts® and is used subject to the Terms and Conditions of Use set forth
on the NAREIT website, including, but not limited to, Section 9 thereof.
that landlords will bill tenants for various costs (utilities, taxes,
insurance, landscaping, etc.) after they have been incurred. In the
case of triple-net leases, the landlord does not pay any of these
operational costs; instead, tenants pay the costs directly. Apartment
landlords typically have one-year leases, and generally can increase
their rents (also called marking-to-market) to keep pace with inflating
costs. The ability to pass along increases in operating costs enables
REIT revenues to keep pace—albeit with some lag—with rising
prices in times of inflation. The result is that REITs generate
inflation-adjusted earnings, which makes their stocks attractive
investments during times of inflation.
Table 2.2 is excerpted from the 2016 Wilshire Report referenced earlier in this chapter, and shows how often different
investments—namely REITs, commodities (as represented by the
S&P GSCI Total Index), the S&P 500 Index, and Treasury Inflation
Protected Securities (TIPS)—generated total returns that exceeded
inflation. The higher the percentage shown, the more effective the
investment was at protecting (or hedging) against inflation. From
1975 through 2015, REIT total returns exceeded inflation 74 percent
of the time on a rolling 6-month basis, and 75 percent of the time on
Why Invest in REITs?
25
Table 2.2 Percent of Rolling Periods in Which Total Return Met or Exceeded
Inflation: 1975–2015
6-month rolling returns
12-month rolling returns
FTSE All Equity
REITs Index
S&P GSCI
Total Index
S&P 500
Index
Barclays Capital
U.S. TIPS Index∗
74%
75%
56%
57%
69%
72%
69%
74%
∗ Barclays
Capital U.S. TIPS Index inception was October 1, 1997.
Sources: Wilshire Compass; U.S. Department of Labor, Bureau of Labor Statistics. Reproduced from the
2016 Wilshire Report and by permission of the National Association of Real Estate Investment Trusts®
(“NAREIT”) and is used subject to the Terms and Conditions of Use set forth on the NAREIT website,
including but not limited to, Section 9 thereof.
a rolling 12-month basis. REITs’ ability to produce total returns that
were greater than inflation was comparable to owning TIPS, which
exceeded inflation 69 percent of the time over a 6-month period
and 74 percent of the time over a 12-month period. Although it
is not surprising that REITs’ inflation protection exceeded that of
stocks in the S&P 500 Index (69 percent and 72 percent on 6- and
12-month rolling returns, respectively), it may surprise investors to
learn that REITs also were a much more effective hedge against
inflation than commodities, where returns exceeded inflation only
56 percent of the time on a rolling 6-month basis and 57 percent of
the time on a 12-month basis.
Transparent Corporate Structures
The REIT industry is highly transparent in part because, as publicly
traded firms, each company faces a high degree of scrutiny every
quarter. There are over 30 firms in the United States. that provide
equity research on REITs. Additionally, based on data provided by
S&P Global Market Intelligence, 80 of the 223 REITs in the FTSE
NAREIT All REITs Index at the end of 2015 were investment-grade
rated and another 24 were rated but below investment grade, for a
total of 104 rated REITs. (Please see Appendix D, REITs with Credit
Ratings.) These 104 companies represent approximately 80 percent
of the industry’s equity market capitalization and have at least one
fixed-income analyst also scrutinizing their quarterly results. If a management team pursues a questionable business practice, such as using
short-term variable rate debt to finance growth, one of these analysts is bound to report on it, alerting investors and likely causing
that REIT’s valuation to suffer. Against the backdrop of accounting
26
The Intelligent REIT Investor
scandals like the Enron Corporation (former NYSE: ENE) in 2001
and Ponzi schemes like that of Bernie Madoff, which was revealed
in 2008, investors increasingly take comfort in REITs because of the
daily scrutiny they endure from the analyst communities.
Secondly, REITs are compelled to pay out at least 90 percent of
their otherwise taxable income, and many pay out 100 percent or
more. REITs also pay their dividends in cash (though the IRS has,
in the past, allowed REITs to issue new stock to pay their dividends)
and, therefore, operate with limited retained earnings. As a result,
they generally issue new public equity every other year in order to
finance growth. Whichever Wall Street firm a management team
selects to underwrite a stock issuance will subject the REIT to
yet another level of scrutiny as part of the investment bank’s due
diligence. As the accounting irregularities discovered at American
Realty Capital Properties’ (formerly NYSE: ARCP) in 2014 proved,
the REIT industry is not immune to scandal. However, incidents
of fraud are few and far between in the REIT world. The difficulty
REIT management teams would have in hiding accounting irregularities for any extended period of time, without disrupting their
ability to pay dividends or without being found out by the analyst
community or underwriters, minimizes the risk of fraud. The heavy
scrutiny under which REITs operate, as well as the discipline the
dividend payout requirement imposes on management, combine
to make REITs a highly transparent investment class that investors
increasingly turn to for steady appreciation and attractive yield.
3
C H A P T E R
REIT Dividends
A
s Chapter 2 highlighted, many investors are drawn to REITs
first and foremost because of the attractive yield they offer relative
to bonds or other stocks. A REIT’s dividend yield is only attractive,
however, if it is sustainable and, preferably, able to be increased over
time. This chapter discusses how to calculate a REIT’s yield, as well
as how to assess the safety and sustainability of a REIT’s common
dividend. Additionally, because investors pay the taxes on the dividend income they receive, this chapter addresses REIT dividend
taxation. Last, this chapter highlights the risks and rewards associated with investing in preferred stock of REITs. Preferred dividends
provide a premium yield to common dividends of the same REIT, but
there are several potential risks investors need to understand before
investing in the preferred stock of any REIT.
Rockland REIT
Rockland REIT (ticker symbol: ROCK) is a fictional company used to
illustrate concepts discussed in this and the remaining chapters.
REIT Yields
A REIT’s distribution requirement is based on taxable income for
IRS purposes, rather than income as calculated in accordance with
Generally Accepted Accounting Principles (GAAP) for financial
reporting purposes. Because REITs must pay out at least 90 percent
27
28
The Intelligent REIT Investor
16%
Average Yields, 1977–2015:
14%
FTSE NAREIT All REITs
10-Year US Treasury
S&P 500 Index
12%
7.4%
6.4%
2.8%
10%
8%
6%
4%
2%
S&P 500
FTSE NAREIT All REITs
15
13
20
11
20
09
20
07
20
05
20
03
20
01
20
99
20
97
19
95
19
93
19
19
89
91
19
19
85
87
19
19
81
83
19
79
19
19
19
77
0%
10-Year Treasury
Figure 3.1 REIT Yields versus Yields on Other Investments
Sources: NAREIT; Yahoo! Finance.
of their taxable income each year to shareholders in the form of
dividends, their yields tend to be higher than the yields on other
income investments, such as U.S. Treasuries and corporate bonds.
Figure 3.1 illustrates the average yield REITs have offered investors
over time, versus the yield on the S&P 500 Index and on 10-year
U.S. Treasuries. At the end of 2015, the FTSE NAREIT All REITs
Index offered a 4.3 percent yield, or approximately 200 basis points
higher than the 2.3 percent yield on 10-year U.S. Treasuries and the
2.2 percent dividend yield from companies in the S&P 500 Index.
Additionally and according to statistics provided by NAREIT, from
1990 through 2015, the 6.4 percent average yield offered by REITs
averaged 180 basis points higher than the average yield on 10-year
Treasuries during the same period.
As with any stock, a REIT’s current yield equals the current
stock price divided into the most recently paid dividend, annualized
(multiplied by four, in most cases). Because many investors hold
investments for several years, it is also important to understand
the concept of yield on cost, which is calculated by dividing the
current dividend annualized by the investor’s cost basis in the REIT’s
common or preferred stock:
Current quarterly dividend × 4
Yield on Cost =
Shareholder’s per share cost basis
REIT Dividends
29
For example, assume an investor paid $10 per share two years ago
for common stock of Rockland REIT. Today, Rockland REIT’s stock
price is $15 per share and it pays a quarterly dividend of $0.25, which
annualizes to one dollar. The REIT’s current yield is 6.7% (or $1 ÷
$15), but the investor’s yield on cost is 10%, calculated as the $1.00
annualized dividend divided by their $10 cost basis. When evaluating
whether to sell these REIT shares in order to invest in a different
stock or bond, the investor will need to compare the 10% yield on
cost to the current yields of competing investments.
A few REITs pay dividends on a monthly, instead of quarterly
basis. In such cases, their current dividend needs to be multiplied by
12, rather than 4, to calculate their annualized yield. Note also that
REITs sometimes pay special dividends, usually in association with
realizing large gains on properties sold. It is important to exclude
special dividends from the above yield calculations, as these cash payouts are nonrecurring. Table 3.1 lists those REITs that were paying
monthly dividends at the end of 2015.
Table 3.1 U.S. REITs That Pay Monthly Dividends
Ticker
Type
American Capital Agency
Apple Hospitality
Armour Residential
Chatham Lodging Trust
EPR Properties
AGNC
APLE
ARR
CLDT
EPR
Mortgage REIT
Equity REIT
Mortgage REIT
Equity REIT
Equity REIT
Five Oaks Investment
Gladstone Commercial Corporation
Gladstone Land Corporation
Global Net Lease
Inland Real Estate Corporation
Independence Realty Trust
Javelin Mortgage
LTC Properties
New York REIT
Orchid Island Capital
Realty Income
STAG Industrial
OAKS
GOOD
LAND
GNL
IRC
IRT
JMI
LTC
NYRT
ORC
O
STAG
Mortgage REIT
Equity REIT
Equity REIT
Equity REIT
Equity REIT
Equity REIT
Mortgage REIT
Equity REIT
Equity REIT
Mortgage REIT
Equity REIT
Equity REIT
United Development Funding
Wheeler Real Estate Investment
Whitestone REIT
UDF
WHLR
WSR
Mortgage REIT
Equity REIT
Equity REIT
Source: S&P Global Market Intelligence.
30
The Intelligent REIT Investor
Are REIT Yields Safe?
REIT yields may be attractive, but they are meaningless if the
dividend behind them is not sustainable. Brad Thomas, who writes
for Forbes on his online platform, www.TheIntelligentREITInvestor
.com, often warns readers to avoid REITs that pay a “sucker yield.”
Investopedia.com defines “sucker yield” as the allure that highyielding investments have with many investors; hypnotized by the
attractively high yield, these investors fail to realize the investment’s
fundamentals are unpredictable and/or unreliable, which ultimately
leads to the dividend being partially or completely cut (i.e., the
sucker punch).
REITs that offer sucker yields tend to be the exception rather
than the norm. Historically, the contractual nature of rental revenue
from leases has enabled REITs to pay dividends that have proved
to be secure, even during most economic recessions. Equity REITs
derive the majority of their income from leases that, depending on
their duration and the credit of the tenant, provide REITs with recurring, more bond-like cash flows than most non-REIT companies can
offer. Provided a REIT management team does not finance their
company’s growth with excessive levels of leverage, the preferred and
common dividends of that company should be reasonably safe.
That said, the 2007–2008 global financial crisis that precipitated
the Great Recession of 2008–2009 served as a grim reminder about
economic and market forces that can jeopardize REIT dividends.
According to S&P Global Market Intelligence, in 2008–2009 over
two-thirds of all REITs cut or suspended their common dividends in
order to conserve cash. Equity REIT returns were a dismal negative
37.7 percent in 2008, before rebounding to a positive 28.0 percent
in 2009. (Please refer to Table 1.1 in Chapter 1 for annual REIT
returns.) Despite widespread dividend cuts, in 2008 REITs underperformed the S&P 500 Index by only 73 basis points and then actually
outperformed that index by 153 basis points in 2009.
The rash of dividend cuts by REITs during the Great Recession
was similar to the percent of REITs that slashed their dividends in the
wake of the savings-and-loan crisis of the late 1980s. In both instances,
a broad liquidity crisis translated into dividend cuts for the majority
of REITs. Unsurprisingly, the REITs that did not cut or suspend their
dividends were ones with lower levels of debt, and also ones with little
debt maturing during the crisis years.
REIT Dividends
31
Rule of Thumb
In a credit crisis, like the United States endured in 2007–2009 and
in the savings-and-loan crisis of the late 1980s, many REIT boards
of directors will elect to cut or even temporarily suspend dividend
payments to preserve capital. To mitigate the risk of a dividend cut,
invest in REITs with lower leverage levels than their peers.
Quantifying Dividend Safety
Investors can use two approaches to quantify dividend safety, the first
of which focuses on near-term expected earnings growth and the second of which measures a REIT’s balance sheet leverage. Chapter 8
provides the calculations for other metrics that assess the relative
health of individual companies.
Dividend/FFO Payout Ratio
A REIT’s expected dividend payout ratio is calculated as its current
annualized dividend, divided by an estimate of next year’s expected
funds from operation (FFO) per share. REITs use FFO to measure
profitability instead of earnings per share (EPS). Estimates of FFO
per share may be obtained from individual company reports generated by investment banks’ research departments and from data
service providers, such as S&P Global Market Intelligence and Thomson’s First Call. The resulting dividend/FFO payout ratio (which is
also referred to as an FFO payout ratio) gives a quick thumbnail sketch
about a REIT’s ability to pay its current dividend. An FFO payout ratio
below 1.0 indicates that Wall Street expects that REIT to generate
FFO sufficient to cover its current annualized dividend. By contrast,
an FFO payout ratio above 1.0 should generate immediate concern
and cause potential investors to dig deeper into a REIT’s expected
earnings ability.
Investor Tip
If the Dividend/FFO ratio for a REIT is greater than 1.0, the dividend
may be at risk.
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The Intelligent REIT Investor
Debt Ultimately Determines Dividend Safety
REITs can enhance the safety of their dividend by managing their
operations with lower amounts of debt. Common dividends represent the most junior claim on a company’s cash flow, meaning that
a company is obligated to pay interest and principal due to lenders
and dividends associated with any preferred stock before paying the
dividend due to common shareholders. Accordingly, the less debt
a company has, the more likely it will be able to pay its common
dividend. Investors can calculate two leverage metrics—debt-to–total
market capitalization and debt-to–gross book value—to determine
if a REIT potentially has too much debt. Chapter 8 walks through
the calculation of both metrics, so this chapter simply cites some
historical data.
Debt-to–Total Market Capitalization Ratio
As of December 31, 2015 and according to NAREIT, equity REITs
average debt-to–total market capitalization ratio was 36.0 percent.
Including mortgage REITs, this ratio was 46.4 percent. Because the
debt-to–total capitalization ratio changes depending on a REIT’s
current stock price, this ratio can over- or understate a company’s
leverage, depending on market conditions. For example, if Rockland
REIT has $100 million of debt and 10 million common shares that
trade at $15 a share, then it has a debt-to–total market capitalization
ratio of 40 percent:
$100 of debt ÷ ($100 of debt + [$15 × 10 shares of ROCK]) = 40%
If Rockland REIT’s stock dips to $10 per share, however, its
debt-to–total market capitalization ratio increases to 50 percent:
$100 of debt ÷ ($100 of debt + [$10 × 10 shares of ROCK]) = 50%
Because a variety of events influence a company’s stock price, not
all of which are within a management team’s control, a more certain
way of gauging a REIT’s leverage is to use a REIT’s debt-to–gross book
value ratio.
Debt-to–Gross Book Value Ratio
Gross book value can be calculated by taking total assets listed on
the balance sheet of the financial statements, less any goodwill or
REIT Dividends
33
Less Is More
To minimize the risk of investing in REITs that offer sucker yields,
investors should focus on REITs whose debt-to–gross book value is
50 percent (or less).
intangibles, plus any accumulated depreciation and amortization
(generally listed in the footnotes to the financial statements). As of
December 31, 2015, the average debt-to–gross book ratio of equity
REITs was 36 percent (including mREITs, this ratio was 46 percent). Putting this industry statistic into context, private landlords,
including private equity firms that have taken publicly traded
REITs private in 2005–2007, had employed as much as 90 percent
leverage to finance their real estate purchases. At the end of 2006,
which was the last year before the 2007–2008 global financial crisis,
equity REITs had an average debt-to–gross book value of 57 percent.
Although some REITs exceeded what, in hindsight, were prudent
levels of leverage, REITs nonetheless were more conservative in their
use of leverage than the average private real estate investor.
In fact, out of the 130 REITs that composed the FTSE NAREIT All
REITs Index at the end of 2006 and before the global financial crisis,
only one REIT, General Growth Properties (NYSE: GGP), filed for
protection from its creditors under Chapter 11 bankruptcy. Before
the crisis, General Growth Properties’ debt-to–gross book value ratio
was 74 percent, or 17 percentage points higher than the industry
average. The company restructured its debt in the bankruptcy courts
and, in November 2010, emerged from bankruptcy. At the end of
2015, General Growth Properties’ debt-to–gross book value ratio was
54 percent, which is still higher than the industry average ratio, but
much more conservative than the company’s historical levels. (Note
that most of the debt-to–gross book value ratios cited in the section
were provided by S&P Global Market Intelligence.)
Legal Standing of Leases Supports Dividend Safety
As is discussed in Chapter 4, Leases, bankruptcy courts view leases
as operating expenses, which are legally senior to non-operating
expenses—meaning the tenant is obligated to pay their rent before
paying any interest or principal on outstanding debt, or any dividends on preferred or common stock. Therefore, even if a REIT’s
34
The Intelligent REIT Investor
tenant goes bankrupt, the tenant must continue paying the REIT
its contractual rent until the bankruptcy court judge allows the
tenant to reject the lease. As a result, REITs generally do not go
bankrupt, even when some of their tenants do. The relative stability
and visibility of these underlying cash flows are a primary reason
that investors view real estate and REITs as defensive investments
that pay reasonably safe dividends.
REIT Dividends and Taxation
The two most widely known features of REITs are that they pay relatively high dividends and that they generally do not pay corporate
income taxes. To qualify each year as a REIT for IRS purposes, REITs
must pay their common and preferred shareholders dividends that
equal at least 90 percent of what would otherwise be taxable income.
If a REIT pays out only 90 percent of its taxable income, it will owe
corporate taxes on the 10 percent it retains. By distributing 100
percent of taxable income (including capital gains) and satisfying
other REIT requirements, REITs can avoid paying corporate income
taxes. The REIT shareholders then pay their appropriate taxes
on the dividend income received. As the example in Table 3.2
illustrates, the REIT structure provides higher after-tax income to
shareholders, based on the following assumptions:
• C-Corp and REIT both have 35 percent marginal tax rates.
• C-Corp and REIT both have 90 percent payout ratios.
• The personal marginal tax rate for investors is 25 percent.
The 90 percent minimum distribution requirement governing REITs helps shareholders in two ways. First, it translates into
above-average dividend income (almost always in cash). In the
simple example in Table 3.2 the investor pockets an extra $23.62 (or
$67.50 minus $43.88) in after-tax dividend income from the REIT
investment versus the regular C-corporation investment. Second,
REIT management teams must manage their portfolios and balance
sheets conservatively enough to be able to maintain the dividend.
REITs can elect to reduce or cut their common dividends, but not
without severely damaging short-term stock price performance in
the process. This chapter addresses basic facts investors should know
before buying REITs for dividend income.
REIT Dividends
35
Table 3.2 Example of After-Tax Income for C-Corporations versus REITs
C-Corp
Earnings before taxes
– Taxes (35%)
Net income
– Dividends (90%)
Retained earnings
Dividend income
− Personal tax (25%)
After-tax income
$100.00
−35.00
_______
65.00
−58.50
_______
$6.50
Investor
_______
$58.50
−14.63
_______
$43.87
REIT
Earnings before taxes
− Dividends (90%)
Taxable income
− Taxes (35%)
Retained earnings
Dividend income
− Personal tax (25%)
After-tax income
$100.00
−90.00
_______
10.00
−3.50
_______
$6.50
Investor
_______
$90.00
−22.50
_______
$67.50
REITs Do Not Pay Out All of Their Cash in Dividends
Investors often make the mistake of thinking REITs pay out all of
their free cash flow in the form of dividends. In fact, the cash REITs
generate from their properties typically is greater than the dividends
they pay to shareholders. From an accounting perspective, taxable
income for IRS purposes is often less than the dividend paid to
shareholders, resulting in no tax obligation to the REIT. Taxable
income is calculated according to rules set by the IRS, whereas net
income for public reporting purposes to the SEC is determined by
GAAP. In calculating both types of income, REITs are permitted to
deduct many noncash expenses, such as the annual depreciation of
their buildings. Note that only the buildings themselves, and not the
land on which buildings are constructed, are depreciable.
For example, if Rockland REIT buys a building for $11 million,
and the land under it is worth $1 million, then Rockland REIT
will depreciate the $10 million building over a 40-year period. This
annual $250,000 expense (equal to $10 million divided by 40 years)
reduces Rockland REIT’s income for IRS and GAAP purposes;
because the $250,000 represents an expense only for GAAP purposes, the company does not use cash to pay it. Instead, Rockland
REIT reduces its basis in that building by $250,000 each year.
Continuing the example, after four years, the Rockland REIT’s basis
in the property will be $9 million, calculated as the building’s initial
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The Intelligent REIT Investor
$10 million cost, less four years of $250,000 depreciation expense
(i.e., $10 million less [4 years × $250,000 annual depreciation
expense]).
The Components of a REIT’s Common Dividend
The example in Table 3.2 was an oversimplified illustration of
how REITs’ common dividends are taxed at the individual investor
level. Rarely is a REIT’s dividend taxed entirely as ordinary income.
Instead, a REIT dividend generally consists of a combination of
three types of income, which are taxed at different levels. These three
income classifications are:
1. Ordinary dividends (individual shareholders’ tax rates apply)
2. Capital gains (generally 15% at December 31, 2015), and
3. Returns of capital (nontaxable)
REITs typically disclose the tax treatment of each year’s dividends
in a press release issued in late January or early February. (Refer
to each REIT’s website for current and past press releases. Website
addresses for the 223 REITs in the FTSE All REITs Index at the end
of 2015 are provided in Appendix C.) The “dividend treatment” press
release typically contains a table that clearly states how much of the
common dividend should be taxed as ordinary dividend income, how
much is a classified as capital gains, and how much, if any, is a nontaxable return of capital.
Ordinary Dividend Income
Generally, the majority of REIT common dividends are characterized
and taxed as ordinary income, meaning that the business activities
that generated the cash flow being paid out as dividends to shareholders were “ordinary,” such as from collecting rents. So if investors
receive $1.00 per share in dividends and are in the 25 percent ordinary income tax bracket, they will owe $0.25 of federal taxes on every
dollar of REIT dividends they receive. However, if a REIT engages in
transactions during its fiscal year that are not ordinary, such as selling
a building at a gain or loss relative to its investment basis, the REIT
may recognize long-term capital gains and/or returns of capital, both
of which are discussed next.
REIT Dividends
37
Capital Gains
If a REIT sells an asset for more money than its depreciated basis
(also referred to as its net book value in the property), the REIT will
recognize a capital gain on the sale. The REIT can then pass the
capital gains through to shareholders by classifying part of the common dividend as capital gains. Capital losses are not passed through
to investors, however, because REITs are not limited partnerships.
(See Chapter 6 for a comparison between REITs and limited partnerships.) Shareholders pay taxes on this portion of the dividend,
but at the then-current capital gains rate, which for individuals in
the 25 percent federal income tax bracket at December 31, 2015,
generally was 15 percent.
Returns of Capital
If a REIT distributes more than its taxable income for IRS purposes,
the additional amount paid to shareholders that exceeds 100 percent of taxable income is classified as a return of capital. Returns of
capital are not taxed. Rather, they lower an investor’s basis in a common stock (see examples in Tables 3.3 and 3.4) and eventually may
be taxed in the form of capital gains when the investor sells his or
her shares. Returns of capital, therefore, increase both an investor’s
tax-adjusted current yield, as well as the after-tax total return he or
she realizes upon sale of the shares. Table 3.3 provides a simple practical example of how a portion of a REIT’s dividend may be classified
as a return of capital.
In summary, a REIT’s common dividend generally consists
of one or more types of income for taxation purposes: ordinary
Table 3.3 Return of Capital Calculation
Assumptions
Rockland REIT has taxable income of $1.25 per share in Year 1.
Also in Year 1, Rockland REIT pays an annual dividend of $1.50 per share.
Conclusions
The amount of the dividend that exceeds 100% of Rockland REIT’s taxable
income—$0.25 per share in this case—is classified as a return of capital.
Assuming Rockland REIT engaged only in ordinary business in Year 1, the remaining
$1.25 per share of the dividend will be classified as ordinary income to be taxed at the
investor level.
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The Intelligent REIT Investor
Table 3.4 Sample Calculations of Taxes on Rockland REIT’s Dividend
Assumptions
•
•
•
•
•
•
Rockland REIT pays a dividend of $1.00 per share
The shareholder paid $20.00 for each share of ROCK (so original basis equals $20.00)
The individual ordinary income tax rate is 25%
The individual long-term capital gains tax rate is 15%
Example A—Rockland REIT classifies 100% of its dividend as ordinary income
Example B—Rockland REIT classifies 60% of its dividend as ordinary income, 25% as a
long-term capital gain, and 15% as a return of capital
Example A
Example B
Shareholder’s dividend received from Rockland REIT
$1.00
$1.00
× Percent of dividend classified as ordinary income
Income taxable at ordinary rate
× 100%
$1.00
× 60%
$0.60
× Federal tax rate on ordinary income
(A) Income tax due on ordinary income
× 25%
$0.25
× 25%
$0.15
Shareholder’s dividend received from Rockland REIT
—
$1.00
× Percent of dividend classified as long-term capital gains
Income taxable at capital gains rate
—
—
× 25%
$0.25
× Federal tax rate on long-term capital gains
—
× 15%
(B) Income tax due on long-term capital gains
—
$0.04
Shareholder’s dividend received from Rockland REIT
× Percent of dividend classified as return of capital
—
—
$1.00
× 15%
Income taxable as return of capital
× Federal tax rate on capital gains
—
—
$0.15
—
(C) Income tax due on returns of capital
—
$0.00
(D) Shareholder’s total tax liability (A + B + C)
Effective tax rate for shareholder
$0.25
25%
$0.19
19%
Shareholder’s original basis in Rockland REIT shares
− Return of capital received
$20.00
—
$20.00
($0.15)
(E) New basis in Rockland REIT
$20.00
$19.85
3.8%
4.1%
After-tax yield on Rockland REIT shares [($1.00 – D)/E]
REIT Dividends
39
income, which is taxed at the highest individual or “ordinary” rate;
capital gains, which are taxed at the long-term capital gains tax
rate; and returns of capital, which are not taxed and which lower
a shareholder’s cost basis in each share. When a REIT classifies
portions of its dividend as long-term capital gains or returns of
capital, the shareholder’s effective tax rate is lower than if the
dividend were classified entirely as ordinary income.
Examples A and B in Table 3.4 illustrate how an individual
investor in the 25 percent income tax bracket would calculate his
tax liability on Rockland REIT’s common dividend using 2015 tax
rates.
Example A in Table 3.4 illustrates the investor’s tax liability
assuming the entire dividend is ordinary income. Example B in
Table 3.4 illustrates how having some of the dividend classified as
long-term capital gains or returns of capital lowers an investor’s
effective tax rate on dividends.
REIT Dividends and the Bush Tax Cuts
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (also known
as the Bush Tax Cuts) lowered the individual’s tax rate on previously taxed earnings of C-corporations paid out to shareholders
as dividends to a maximum of 15 percent. The distinguishing
characteristic of REITs continues to be that their dividends are
exempt from the “double taxation” to which other C-corporation
dividends are subject. As the example in Table 3.2 at the beginning
of this chapter illustrated, dividends paid by C-corporations are
taxed at both the corporate and investor levels. REIT dividends
are not taxed at the corporate level, so the portion of a REIT’s
dividend that is characterized as ordinary taxable income does not
qualify for the lower tax rate; that is, REIT dividends are not qualified
dividends under this law. The Bush Tax Cuts did not affect the
taxation rate shareholders pay on the ordinary income components
of REIT dividends. In 2008, when they were originally designed
to sunset, Congress extended the Bush Tax Cuts to 2012, at which
time they again were extended and, as of now, have no expiration
date. Should Congress ever decide to end the Bush Tax Cuts, the
effective after-tax yield of other C-corporations will decline, whereas
the current taxation of REIT dividends and the expected after-tax
yield will not change.
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The Intelligent REIT Investor
Preferred Stock Dividends
As mentioned earlier, REITs can satisfy their 90 percent payout
requirement by paying dividends to both its common and preferred
shareholders. At the end of 2015 and according to S&P Global
Market Intelligence, the liquidation value of REIT preferred shares
outstanding totaled $29.8 billion, or only 3 percent of public REIT
common equity. Though the market for REIT preferred stock
is small, it nonetheless is worth knowing a few basic facts—and
potential pitfalls—associated with its attractive yield.
Preferred Stock Basics
Preferred stock is often viewed as a hybrid security in that it shares
characteristics with debt and common stock investments. Like a
bond, preferred shares are sold according to a face (or par) value,
which, in the case of preferreds, is usually $25 per share. Unlike
bonds, perpetual preferred stock has no maturity date. Typically,
a REIT that issues preferred shares has the right to redeem (or
call) those shares at par after five years; if the REIT can issue new
preferred shares or debt that has a lower recurring payment than
the old preferred shares, then management will likely call those
preferred shares and issue lower-cost capital to pay for the redemption. Similar to common stock, preferred shares pay investors
a quarterly dividend. Like a bond, the preferred dividend is often a
fixed amount based on par value, though sometimes the preferred
shares contain a ratchet feature so that the preferred dividend
increases by the same percentage as the common dividend in
subsequent years.
Risks to Owning Preferred Shares
There are three risks investors need to keep in mind when investing in preferred shares for dividend income, each of which involves
liquidity or lack thereof. First, the secondary market for REIT preferred stock is not as liquid as the market for common stock in the
same company. This means that investors may have some difficulty
selling (or even pricing) their preferred shares when they want or
need their principal back.
REIT Dividends
41
Unintentional Mezzanine Lenders
During a change in control, investors of many REIT preferred stock
issuances bear the risk of becoming unwilling mezzanine lenders, as
the acquiring entity often is not required to “cash-out” holders of
the target REIT’s preferred stock.
Second, it is important to read and understand the term sheet
in the prospectus of each preferred stock issuance before investing.
Although the preceding paragraph detailed general terms that
are typical for preferred stock issuances, there is no consistent
underwriting standard to which issuers of preferred stock must
conform. The difference that may exist between what preferred
stock investors assume they are buying and the reality of what they
actually bought can lead to unpleasant and costly surprises. For
example, a REIT that pays a $0.75 per share annualized common
dividend may issue a preferred stock that pays $1.00 per share each
year. If that preferred stock does not contain a ratchet feature or
some other covenant to protect the preferred yield relative to that
of the common shares, the management team legally could increase
the annual common dividend to be greater than $1.00 per share. If
that happens, the preferred issuance will become illiquid, making
it extremely difficult (or impossible) to sell the securities anywhere
close to par. The investors in the preferred stock in this example will
likely have to sell their shares at a steep discount if they want to exit
this investment.
The third level of liquidity risk relates to when there is a change
in control at a REIT, such as when a private equity firm or competing
REIT buys a REIT that has preferred shares outstanding. In all too
many instances, the preferred equity investors of the acquired (or
target) REIT discover that the terms of their preferred stock allow
an acquiring company to suspend their preferred dividend and/or
that the acquiring entity has no obligation to “cash out” the target
REIT’s preferred shareholders. As a result, acquiring companies
often treat existing preferred stock as a form of mezzanine financing
to increase their returns on the deal. The preferred stock investors
become financially marginalized in the new entity, and have no
42
The Intelligent REIT Investor
recourse. In contrast, the target REIT’s common stockholders will
receive cash, stock in the acquiring entity, or both as compensation
for their investment.
Conclusion
The income that investors can access by investing in REITs is a
powerful wealth-building tool, but only if the REITs can sustain and
preferably grow their dividends over time. The wealth destruction
and underperformance associated with REITs that have cut their
common dividends in the past is examined more thoroughly in
Chapter 7, REIT Performance.
4
C H A P T E R
Leases
P
rior to exploring the different types of commercial properties
that REITs own, it is instructive to understand the different types
of leases that REITs, as landlords, use. A lease is a legal agreement
between a landlord (the lessor, which is the REIT) and a tenant (the
lessee) whereby the tenant agrees to pay rent for a defined period of
time in exchange for the right to occupy the landlord’s space. Most
leases require monthly payments of rent, but other intervals—for
example, as annual payments—can also exist. It depends on the
terms agreed to between the landlord and tenant. The terms of
the lease discussed in this chapter are negotiated between the
landlord and tenant and spelled out in the lease agreement.
Along with the length of each lease, which is usually expressed
in months or years, different lease structures translate into different
cash flow streams to a landlord. Tenants and landlords negotiate all
aspects of a lease, including the length of time a property will be
leased (lease length, term, or duration), who will pay for which operating expenses, and who will pay for improvements to the tenant’s
space. Each type of lease allocates different costs to the landlord or
tenant and determines which person bears the risk of paying higher
costs if utility or other expenses increase. Lease length and structure,
therefore, are fundamental predictors of REIT stock price performance, which is discussed at length in Chapter 7. The content of
this chapter provides an overview of the four major types of leases,
including which structures are most commonly used among different
property types.
43
44
The Intelligent REIT Investor
Lease Terminology
Most people are familiar with the concept of paying rent, but many
are not aware of the different types of rent they will pay under different scenarios. An asking rent of $15 per square foot listed on a building’s “for rent” sign means something very different under a gross
lease than under a full-service lease, both of which are addressed on
the following pages. Before discussing the four basic types of leases,
it is helpful to become familiar with some basic terminology:
• Base year is the 12 months of a lease or the period that ends
with the first full calendar year of a lease. In the latter instance,
the base year will be more than 12 months. It is often used to set
the expense stop (defined below) in a full-service or modified
gross lease.
• Common area maintenance (CAM) are charges the landlord
incurs to maintain areas of a multi-tenanted property (which
simply is a building that has more than one tenant) that are
accessible to all tenants, such as the landlord’s property management fee, labor costs associated with the building’s engineering team, lobbies, shared restrooms, and a parking area.
In a multi-building office park or campus, CAM fees can also
include costs associated with a fitness center or foodservice
area that are accessible by tenants throughout the campus.
CAM fees are in addition to a tenant’s base rent, and the landlord typically bills tenants according to the percentage of the
building they rent. For example, if a tenant’s space represents
one-third of the building’s rentable square footage, then that
tenant would be billed for one-third of the CAM associated
with the building’s upkeep.
• Escalation clauses, or escalators, are set future increases in rent
that the tenant agrees to pay during the course of a lease. Escalations can be expressed in dollar amounts or as a percent
and typically occur on an annual basis. Rent escalations tend
to be tied to increases in the Consumer Price Index (CPI) or
expressed as fixed periodic increases. As an example, a tenant may agree to pay a monthly base rent of $1,000 in year 1,
and then an additional $100 per month each subsequent year
for the duration of the lease. In year 5, therefore, the tenant’s
Leases
45
monthly rent would have escalated to $1,400 (Year 1 = $1,000;
Year 2 = $1,100; Year 3 = $1,200; Year 4 = $1,300; Year 5 =
$1,400).
• Expense stops are most common in full-service and modified
gross leases. The landlord will bear the operating expenses
and CAM associated with the tenant’s space up to the expense
stop amount; the tenant will bear any expense overage. For
example, operating expenses and CAM on Tenant A’s space
in Year 1 are $4.50 per square foot, so the expense stop is set
for the duration of the lease at that level. For the remainder of
the lease, the landlord will use $4.50 of the base rent received
to pay the tenant’s operating expenses, and will bill the tenant
for any amounts that exceed this expense stop.
◦ Capped expenses are similar to expense stops and, in some
areas of the country, are referred to as expense stops. However, instead of being a fixed dollar amount, expense stops
are a maximum percentage increase in expenses.
• Leasing commissions (LCs) are paid to real estate brokers who
represent the tenant and/or landlord. (Tenants’ brokers are
often referred to as tenant reps.) Typically the brokers are paid
50 percent of their LC upon lease execution and 50 percent
upon lease commencement. The LC generally is calculated as
2 to 8 percent of the total rent payable for the initial term of
the lease. So if a tenant will pay a landlord total annual rent
of $10,000 for three years, and the leasing commission rate in
that market is 4 percent, then the landlord will need to pay the
leasing agent $1,200 ($10,000 × 3 years × 4 percent). If there
is a broker representing the landlord, then an additional LC
would be owed following a similar schedule.
• Operating expenses are costs associated with operating and
maintaining the rented area of a building. Such costs include
real estate taxes, property insurance, utilities, and janitorial
services for tenant-specific areas (as opposed to common
areas shared with other tenants). Operating expenses do not
include capital expenditures for structural maintenance of
the building, and they do not include interest payments on
any mortgage associated with the property being leased. Each
lease specifically identifies what can and cannot be included
as part of the operating expenses.
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The Intelligent REIT Investor
• Rent—There are different types of rental revenue a landlord
can receive. Table 4.1 summarizes the different types of rent,
including escalations (as described in the preceding text):
◦ Total, base, gross, or contract rent are all ways of describing
the amount of money a tenant will have to pay the landlord
each period, as defined in the lease. It includes agreed-upon
expense stops and reflects any rent escalations that have
become effective.
Table 4.1 Comparison of Different Types of Rent
Assumptions
• 15,000-square-foot rentable
area
• 5-year lease term
• $25.00 base rent per square
foot
• $4.50 expense stop & CAM
Total rent per square foot
+ Escalation
New total rent per square foot
× Rentable square feet
Total rent
– Expense stopa
Net rent before concessions
– 4 months of free base rent
Effective rent landlord realizes
Less:
Tenant improvement
allowanceb
Leasing commissionc
Net effective rent received by
landlord
Aggregate net effective rent
received
Net effective rent per square
footd
a
• 3% annual escalations on base rent
• 4% leasing commission
• 4 months of rent (after concessions)
• TI allowance of $15 per square foot
Year 1
Year 2
Year 3
Year 4
Year 5
$25.00
—
_________
$25.00
15,000
_________
$375,000
–67,500
_________
307,500
–125,000
_________
182,500
$25.00
$0.75
________
$25.75
15,000
________
$386,250
–67,500
________
318,750
$25.75
$0.77
________
$26.52
15,000
________
$397,838
–67,500
________
330,338
$26.52
$0.80
________
$27.32
15,000
________
$409,773
–67,500
________
342,273
$27.32
$0.82
________
$28.14
15,000
________
$422,066
–67,500
________
354,566
________
318,750
________
330,338
________
342,273
________
354,566
________
$318,750
________
$330,338
________
$342,273
________
$354,566
–225,000
–61,137
_________
–$103,637
$1,242,289
$16.56
Expense stop and CAM is calculated as $4.50 × 15,000 rentable square feet.
is calculated by multiplying the $15 TI allowance times the rentable square feet, or $15 × 15,000.
c LC is calculated by adding the “Effective rent landlord realizes” in all five years, times 4%.
d
The net effective rent per square foot equals the “Aggregate net effective rent received,” divided by the
rentable square feet, divided by the lease term ($1,242,289 ÷ 15,000 SF ÷ 5 years).
b TI
Leases
47
◦ Net rent is the amount of rent a landlord retains each
period, after paying (or net of ) expenses associated with
property operations and maintenance.
◦ Effective rent is net rent, adjusted to reflect the cost of
any concessions and leasing commissions the landlord
has agreed to as part of the lease agreement. The most
common concessions are tenant improvements and free
rent, both of which are discussed later in this chapter.
◦ Free rent is a period of time (usually a few months but
sometimes up to one year) during which time a landlord
grants the tenant occupancy rights to the rental space
without requiring contract rent be paid. Free rent is a
concession a landlord is willing to pay to entice a tenant to
lease a space.
◦ Market rent is the rental rate associated with comparable
spaces in similar buildings and locations.
• Square feet—There also are different ways of measuring the
same building, depending on the information needed:
◦ Gross square feet (or gross building area) measures a building’s total constructed area to the outside of its walls. Gross
square feet generally is not used for leasing purposes unless
the tenant leases the entire building, in which case the gross
square feet equals the rentable square feet.
◦ Rentable square feet is the sum measurement of a tenant’s
useable area, plus that tenant’s pro rata share of the building’s common areas.
◦ Useable square feet (or useable area) measures the amount
of space that can be used by tenants within the walls defining
the space they have rented. Note that if a building is leased
entirely to a single tenant, then rentable square feet equals
useable square feet.
• Tenant improvement (TI) allowance is an amount of money
the landlord is willing to spend on a space to retain an existing
To summarize square footage measurements:
• Multi-tenanted building:
Gross > Rentable > Useable
• Single-tenant building:
Gross = Rentable = Useable
48
The Intelligent REIT Investor
tenant or entice a new tenant to lease a space. Note that TIs
paid by a landlord that improve the future leaseability of
a space—such as lobby and bathroom improvements—are
depreciated on a different schedule than the building itself.
Tenant improvements typically are depreciated over a 7-year
life, versus a 15-year life for leasehold improvements, and
40 years for the base building.
◦ TIs for first-generation space—When space is newly constructed, the landlord typically budgets for a higher TI
allowance because the tenant will need to build out space
from a shell (also referred to as unimproved) condition.
Because of the greater expense associated with building out
new space, tenants that lease first-generation space typically
sign longer-term leases of five or more years. Tenants often
exceed the landlord’s TI allowance and invest additional
money into their space. The more a tenant invests its own
money into rental space, the more likely that tenant is to
renew the lease at the end of the lease term.
◦ TIs for second-generation space—When a space has been
occupied previously, it is called second-generation space.
The TI dollars a landlord pays to retain the existing tenant
tend to be for cosmetic improvements, such as new carpet
and painting walls. If the lease length being negotiated is
long enough or if the landlord is trying to re-tenant the
space with a new tenant (perhaps one with better credit),
then TIs are likely to be higher and include some modest
structural improvements, such as updating the tenant’s
bathroom(s).
The Four Major Types of Leases
There are four broadly defined types of lease agreements: gross, net,
modified gross, and full service. The name of each lease structure
is not universal in nature; each region of the country tends to have
its own nomenclature and lease standards. Putting precise terminology aside, any lease that results from landlord–tenant negotiations
reflects risks and rewards that both parties agree upon and are willing to bear. Table 4.2 summarizes the major types of leases, including
a simplified example of the different payments made by a tenant to
Leases
49
Table 4.2 Comparison of Major Lease Types
Contractual rent per square foot paid to
landlord
– Base year expense stop and CAM†
Net rent to landlord
+ Reimbursement for expense overage‡
Total rent per square foot paid to
landlord
Risk of cost increase borne by:
Who pays what:
• Nonstructural repair and maintenance
• Operating expenses (utilities,
janitorial, etc.)
• Property taxes
• Insurance
• CAM
Property type(s) most associated with
this lease structure:
Gross
Net∗
Modified
Gross
Full
Service
$15.00
$15.00
$19.00
$23.00
n/a
________
15.00
n/a
________
$15.00
n/a
________
15.00
n/a
________
$15.00
−4.00
________
15.00
2.00
________
$17.00
−8.00
________
15.00
2.00
________
$17.00
Landlord
Tenant
Tenant †
Tenant†
Landlord
Landlord
Tenant
Tenant
∗∗
Tenant
Tenant
Landlord
Landlord
Landlord
Tenant
Tenant
Tenant
∗∗
Lowerpriced,
lowerquality
properties
Retail
Industrial
Industrial
Office
∗∗
∗∗
∗∗
Tenant
Tenant
Tenant
Office
Singletenant
∗
Example illustrates a triple-net lease.
a base-year expense stop, the tenant reimburses the landlord for any cost overruns. The only risk
the landlord bears is during the first (or base) year of the lease: if actual expenses per square foot end
up being higher than the amount forecasted in lease negotiations, then the landlord will have to absorb
the cost difference. Also, if the lease is a full-service lease without a base-year expense stop, the landlord
would have to absorb any increases in cost.
‡
To the extent operating and CAM costs exceed established expense stops, the tenant will need to reimburse the landlord.
∗∗
Depends on the terms of the lease. Generally in a modified gross lease, the tenant pays taxes and
insurance.
† With
the landlord according to the general terms associated with each type
of lease, which are described as follows:
1. Gross lease—a lease in which the tenant pays the landlord a
fixed monthly rent and the landlord assumes responsibility
for paying all operating expenses, taxes, and insurance
50
The Intelligent REIT Investor
associated with the property. If costs rise, the landlord
absorbs them, which is another way of saying a gross lease
shifts all the risks onto the landlord during the term of the
lease. The tenant’s rent does not change. Unsurprisingly, the
gross lease is rarely (if ever) used, and often only for short
periods of time and at lower-quality properties.
2. Net lease—a lease in which the tenant pays the landlord a
fixed monthly rent and is also responsible for paying all or
some of the expenses associated with operating, maintaining,
and using the property. There are three levels of “net” that
express which expenses the tenant pays in addition to rent:
• Maintenance, which includes items like utilities, water, janitorial, trash collection, and landscaping
• Taxes
• Insurance
A net lease generally implies the tenant pays rent and
property taxes. In a double-net lease the tenant pays rent,
property taxes, and insurance; the landlord bears the other
costs (though often with an expense stop). A double-net
lease more often is referred to as a “modified gross” or “gross
industrial” lease, which is described in the following paragraph. In a triple-net lease, in addition to the monthly rent,
the tenant pays all costs associated with property operations,
maintenance, insurance, and taxes. The landlord essentially
collects monthly “coupon” payments from the tenant, similar
to receiving monthly interest income from having invested in
a bond.
Triple-net leases are used most often by landlords leasing a freestanding building to a single tenant, where that
tenant wants the operating flexibility associated with the
triple-net structure. Examples of the types of buildings REITs
own that generally are leased using the triple-net structure
include fast-food restaurants, industrial warehouses, healthcare facilities, or office buildings that serve as corporate
headquarters.
3. Modified gross lease—a lease that is similar to the double-net
lease described in the preceding discussion on net leases.
Often called a gross industrial lease, the modified gross lease
is one in which the tenant pays the rent plus the property
taxes and insurance, and any increases in these items over
Leases
51
the base year. The landlord pays the operating expenses and
sometimes the maintenance associated with the property.
In the case in which a landlord uses modified gross leases
and has multiple tenants in one building, the landlord will
charge the tenants a CAM fee. As described at the beginning
of this chapter, CAM charges are additional rent charged for
maintenance that benefits all tenants, such as snow removal
and outdoor lighting. Tenants generally will be charged a
dollar amount representing their proportionate share of
expenses, based on the square feet they lease. Modified gross
leases most often are used with multi-tenant office buildings,
industrial properties, and retail properties.
4. Full-service lease—a lease in which the tenant pays the
landlord a fixed monthly rent that includes an expense
stop calculated off the base year. The landlord pays all the
monthly expenses associated with operating the property,
including utilities, water, taxes, janitorial, trash collection
and landscaping and charges the tenant in subsequent years
to the extent operating expenses exceed the expense stop.
The tenant gets full service in exchange for the monthly
rent and does not have to contract with service providers
directly. Full-service leases most often are associated with
office buildings.
Leases and Tenant Bankruptcy
In the event that a REIT’s tenant goes into bankruptcy, that tenant
still has to pay the rent due under its lease(s) with the REIT. This
is because the leases are viewed by bankruptcy courts as operating
expenses, which have a senior claim over that of creditors or
investors on the cash flows of the company reorganizing under
bankruptcy laws.
Fact: Leases between a REIT and a tenant are viewed by bankruptcy
courts as operating expenses, which are senior to the bankrupt
tenant’s debt obligations to lenders. Accordingly, a tenant must
continue to pay rent to their landlord (the REIT), even while going
through bankruptcy.
52
The Intelligent REIT Investor
The tenant must continue to pay the REIT its contractual rent
until the bankruptcy court judge allows the tenant to “reject” the
lease. The fact that leases are legal, senior claims on the cash flows of
tenants is a major reason that REITs do not necessarily go bankrupt,
even when some of their tenants do. Please see Chapter 3, REIT Dividends, for further discussion of this concept.
FASB and the New Standard for Accounting for Leases
In February 2016, the Financial Accounting Standards Board (FASB)
issued significant and final changes to the accounting treatment
of operating leases (described earlier in this chapter). FASB is
the organization that establishes standards of financial accounting
for U.S. companies, and the SEC recognizes those standards as
being appropriate. Historically, tenants did not capitalize operating
leases on their balance sheets and, instead, treated rent payments
as expenses that were accounted for in their income statements.
The biggest change introduced by FASB’s new standard, which
goes into effect for REITs on January 1, 2019, will cause tenants
to create an asset, which is their right of use on leased space, and
a matching liability on their balance sheets equal to the present
value of lease payments agreed to in their leases. The anticipated
change to the REIT industry is that tenants may prefer to use shorter
duration, triple-net leases in order to minimize the liability they will
begin showing on their balance sheets. Although the bottom-line
economics to REITs should not change, companies will need to
adjust their reporting outputs and leasing processes, accordingly.
Lease Duration and REIT Stock Price Performance
On a fundamental level, a REIT’s cash flow is the sum of all cash
received from tenant leases less any overhead costs for paying management and employees, and the financing costs of any debt the
REIT may have outstanding. Property fundamentals, meaning the
supply of and demand for real estate, differ widely among the various types of commercial properties and ultimately are the largest
governors of REIT returns. However, the length and structure of a
lease also dictate how stable (or volatile) a landlord’s cash flows are
over time. Understanding the type of lease a REIT uses with tenants
will help predict how its common shares will trade during different
economic scenarios.
Leases
53
Knowing the average lease length and the type of lease structure
a REIT uses helps predict how its shares may trade during times of
economic expansion and contraction.
Chapter 7 discusses the relationship between lease length and
stock price performance in more detail, but it is worth highlighting
here, as well. Shorter leases translate into more volatile future
earnings and, by extension, wider daily swings in price for those
REITs’ shares. In contrast, longer leases generate steady income that
is similar to receiving interest payment from a bond. This consistent
income stream tends to translate into stock-price movements that
reflect the underlying stability in rents. Both extremes—short-term
and long-term lease durations—have their respective opportunities
and risks.
5
C H A P T E R
REITs by Property Type
A
s discussed in the first chapter, one of the primary ways to classify REITs is by the type of property in which they invest. This chapter
provides a basic overview of the major property types owned by equity
REITs, as well as detail on mortgage REITs. This chapter also provides sublists of the 181 equity REITs and 42 mortgage REITs that
compose the FTSE NAREIT All REITs Index, sorted according to
NAREIT’s property sector and subsector classifications. (Appendix C
presents additional information on each company, including website
addresses.)
Each type of real estate is associated with distinct supply-anddemand fundamentals that in turn assign certain risks and rewards
to the landlords’ expected income. Although these risks and rewards
become most apparent during times of economic boom or bust,
they constantly govern the profitability of different property types
and by extension affect stock-price performance. This chapter
also highlights economic factors that influence demand for each
property type; Chapter 7 provides a more in-depth discussion of the
links between current economic news such as changes in interest
rates or employment trends, and their effects on the stock prices of
different types of REITs.
Diversified and Specialized REITs
Diversified REITs are equity REITs that invest in two or more types
of commercial property (see Table 5.1). On the opposite end of
the property spectrum are specialty REITs (Table 5.2), which own
55
56
The Intelligent REIT Investor
Table 5.1 Diversified REITs
Company Name
Vornado Realty Trust
VEREIT, Inc.a,b
NorthStar Realty Finance Corp.
W. P. Carey Inc.a
Lexington Realty Trusta
Global Net Leasea
Washington Real Estate
Investment Trust†
Investors Real Estate Trust
American Assets Trust, Inc.
Alexander’s, Inc.
BRT Realty Trust
Gladstone Commercial
Corporation
Whitestone REIT
Winthrop Realty Trust
Armada Hoffler Properties, Inc.
One Liberty Properties, Inc.
HMG/Courtland Properties, Inc.
Total for 17 REITs:
Ticker
Symbol
Total
Assets∗
Website Address
VNO
VER
NRF
WPC
LXP
GNL
WRE
$21,143
17,406
15,403
8,755
3,830
2,548
2,191
www.vno.com
www.vereit.com
www.nrfc.com
www.wpcarey.com
www.lxp.com
www.globalnetlease.com
www.washreit.com
IRET
AAT
ALX
BRT
GOOD
WSR
FUR
AHH
OLP
HMG
1,998
1,978
1,448
836
833
784
746
690
650
32
$81,271
www.iret.com
www.americanassetstrust.com
www.alx-inc.com
www.brtrealty.com
www.GladstoneCommercial.com
www.whitestonereit.com
www.winthropreit.com
www.armadahoffler.com
www.onelibertyproperties.com
www.hmgcourtland.com
∗
As of December 31, 2015, in millions of dollars.
that the associated REIT generally uses long-term triple-net leases.
b Former name: American Realty Capital Properties (formerly NYSE: ARCP).
†
This REIT is in the process of being acquired and will not remain publicly traded.
Source: NAREIT, S&P Global Market Intelligence.
a Indicates
only one type of highly specialized real estate, such as billboards,
correctional facilities, or farmland. Many of the specialty REITs are
new to the industry, though other specialized property types are
more established and now have their own NAREIT classification.
Data center REITs (Table 5.3) own, develop, and manage wholesale
data center properties and data center shells. Infrastructure REITs
(Table 5.4) invest in communications, energy and transportation
projects. Timber REITs (Table 5.5) own acres of forest, the trees on
which are harvested for paper and wood products production. In
2015, there were 44 REITs in these combined categories with total
assets of $214.1 billion.
REITs that use Triple-Net-Leases
Recall from Chapter 4 that a triple-net lease is one in which the
landlord collects a base rent that excludes—meaning it is net
of—taxes, insurance, and maintenance expenses associated with
REITs by Property Type
57
Table 5.2 Specialty REITs
Company Name
Ticker
Symbol
Total
Assets∗
NAREIT
Sub-Property
Type
Website Address
Data Center
www.ironmountain.com
www.eprkc.com
Iron Mountain
Incorporated
EPR Properties
IRM
$6,351
EPR
4,217
Outfront Media
OUT
3,845
Cineplex
Theater
Billboards
GEO Group, Inc.
Lamar Advertising
Corrections Corporation
of America
Gaming and Leisure
Properties, Inc.
Farmland Partners Inc.
GEO
LAMR
CXW
3,503
3,392
3,356
Prison
Billboards
Prison
www.outfrontmedia
.com
www.geogroup.com
www.lamar.com
www.cca.com
GLPI
2,448
Casino
www.glpropinc.com
FPI
345
Land
Gladstone Land
Corporation
American Farmland
Company
Total for 10 REITs:
LAND
230
Land
190
Land
www.farmlandpartners
.com
www.gladstoneland
.com
www.americanfarmland
company.com
AFCO
_______
$27,877
∗
As of December 31, 2015, in millions of dollars.
These REITs generally use long-term triple-net leases and/or ground leases.
Source: NAREIT, S&P Global Market Intelligence.
Table 5.3 Data Center REITs
Company Name
Digital Realty Trust, Inc.
Equinix
DuPont Fabros Technology, Inc.
CyrusOne Inc.
QTS Realty Trust, Inc.
CoreSite Realty Corporation
Total for 6 REITs:
∗
Ticker
Symbol
Total
Assets∗
DLR
EQIX
DFT
CONE
QTS
COR
$11,451
10,357
2,815
2,196
1,758
1,163
$29,739
Website Address
www.digitalrealty.com
www.equinix.com
www.dft.com
www.cyrusone.com
www.qtsdatacenters.com
www.CoreSite.com
As of December 31, 2015, in millions of dollars.
These REITs may use long-term triple-net leases at some or all of their properties.
Source: NAREIT, S&P Global Market Intelligence.
58
The Intelligent REIT Investor
Table 5.4 Infrastructure REITs
Company Name
Ticker
Symbol
Total
Assets∗
American Tower Corp
AMT
$26,904
Crown Castle International Corp
Communications Sales & Leasing
InfraREIT, Inc.
CorEnergy Infrastructure Trust
CCI
CSAL
HIFR
CORR
22,036
2,543
1,664
678
Power REIT
Total for 6 REITs:
PW
22
$53,847
Website Address
www.americantower
.com
www.crowncastle.com
www.cslreit.com
www.infrareitinc.com
www.corenergy
.corridortrust.com
www.pwreit.com
∗
As of December 31, 2015, in millions of dollars.
These REITs generally use long-term triple-net leases and/or ground leases.
Source: NAREIT, S&P Global Market Intelligence.
Table 5.5 Timber REITs
Company Name
Weyerhaeuser Company†
Plum Creek Timber Company, Inc.†
Rayonier Inc.
Potlatch Corporation
CatchMark Timber Trust, Inc.
Total for 5 REITs:
Ticker
Symbol
Total
Assets∗
WY
PCL
RYN
PCH
CTT
$12,486
4,990
2,319
1,017
599
$21,411
Website Address
www.weyerhaeuser.com
www.plumcreek.com
www.rayonier.com
www.potlatchcorp.com
www.catchmark.com
∗ As
of December 31, 2015, in millions of dollars.
These REITs generally use long-term triple-net leases and/or ground leases.
† These two timber REITs are merging; the transaction is expected to be complete in the first half of 2016.
Source: NAREIT, S&P Global Market Intelligence.
occupying the property. These and other operating expenses are
paid directly by the tenant to the various service providers. REITs
that use triple-net leases typically lease their properties to a single
tenant for 10 or more years. NAREIT no longer includes a triple-net
property category. However, companies categorized by NAREIT as
specialty, data center, infrastructure, and timber REITs generally
use triple-net leases (including ground leases), as do some of the
diversified REITs.
REITs by Property Type
59
Risks and Rewards of REITs That Use Triple-Net Leases
During times of economic expansion, landlords that use long-term,
triple-net leases do not profit as much as other landlords that use
shorter-term, gross, or full-service leases because they cannot capture
rising market rents. However, triple-net landlords do benefit from
steady, bond-like cash flows generated by their leases. As a result,
triple-net REITs are viewed as the most defensive, least volatile REITs
and tend to outperform other REITs during times of economic
uncertainty.
One source of risk in the triple-net REIT model relates to how
these companies grow. Few if any of the triple-net REITs grow
through development, and their internal growth is embedded in the
long-term nature of their leases (often indexed to inflation). This
leaves acquisitions as the only source of external growth for these
REITs. As such, it is imperative that these companies attain and
then maintain a low cost of capital. (See Chapters 7 and 8 for a
discussion of REITs’ cost of capital.) By way of a simple example, if
the investment yield on a property leased pursuant to a long-term
triple-net lease is 7 percent, then the triple-net REIT needs to have a
cost of capital that is less than 7 percent in order for the acquisition
to be additive to its future cash flow.
In the last decade, the number of income-oriented investors
competing to buy buildings that are triple-net leased to creditworthy
tenants has increased dramatically. The near-decade of super-low
interest rates in the United States that followed in the wake of the
Great Recession of 2008–2009 was a primary cause of the increase in
demand for many high-yield investments, including triple-net properties that generate yields of 5 percent or more. Although higher
interest rates in the future may cause a marginal decline in property
values, implying higher yields from real estate than today, management teams of triple-net REITs—or any REIT that relies on acquisitions to grow—need to remain vigilant about their costs of capital.
Health-Care REITs
NAREIT lists 17 health-care REITs with combined assets of $114.3
billion (Table 5.6). Health-care REITs receive their income primarily
from leasing facilities to health-care providers, usually on a triple-net
60
The Intelligent REIT Investor
Table 5.6 Health-Care REITs
Company Name
Ticker
Symbol
Total
Assets∗
Welltower Inc.
Ventas, Inc.
HCP, Inc.
Omega Healthcare Investors, Inc.
Senior Housing Properties Trust
Medical Properties Trust, Inc.
HCN
VTR
HCP
OHI
SNH
MPW
Healthcare Trust of America, Inc.
New Senior Investment Group
Care Capital Properties, Inc.
HTA
SNR
CCP
3,172
3,017
2,955
Healthcare Realty Trust
Sabra Health Care REIT, Inc.
National Health Investors, Inc.
Physicians Realty Trust
LTC Properties, Inc.
CareTrust REIT, Inc.
Universal Health Realty Inc Tr
Community Healthcare Trust
Incorporated
Total for 17 REITs:
HR
SBRA
NHI
DOC
LTC
CTRE
UHT
CHCT
2,817
2,486
2,146
1,645
1,275
673
459
143
$29,024
22,262
21,450
8,019
7,184
5,609
Website Address
www.welltower.com
www.ventasreit.com
www.hcpi.com
www.omegahealthcare.com
www.snhreit.com
www.medicalpropertiestrust
.com
www.htareit.com
www.newseniorinv.com
www.carecapitalproperties
.com
www.healthcarerealty.com
www.sabrahealth.com
www.nhireit.com
www.docreit.com
www.ltcreit.com
www.caretrustreit.com
www.uhrit.com
www.communityhealthcare
trust.com
$114,337
∗ As
of December 31, 2015, in millions of dollars.
These REITs generally use long-term triple-net leases and/or ground leases.
Source: NAREIT, S&P Global Market Intelligence.
or modified-gross basis. (Please refer to Chapter 4 for detail on
lease structures.) Property types include senior and assisted-living/
rehabilitation facilities, medical clinics, medical office buildings
(also referred to as MOBs), health-care laboratories, and hospitals.
Population growth, aging demographics, and shifts in consumer
preference have all fueled the growth in nonhospital health-care
locations and in turn health-care REITs. In their January 2013
report, U.S. Healthcare Industry and Medical Office Market Overview, the
Rosen Consulting Group (“RCG”) wrote:
The healthcare industry has been growing at a strong pace for
decades. Looking forward, this trend is expected to accelerate
as baby boomers reach retirement age and echo boomers begin
to establish their own facilities. As demand for medical services
increases, this will further increase the need for physicians, lab
technicians, and other medical support staff, driving demand for
the high-quality . . . MOBs that house them.
REITs by Property Type
61
The Patient Protection and Affordable Care Act, which is commonly
referred to as the Affordable Care Act (ACA or “Obama Care”) was
signed into law in March 2010. By increasing the number of Americans who have access to health insurance, the ACA is viewed as an
additional source of demand in the health-care real estate industry, as
a greater number of cost-efficient facilities will be required to administer health services.
Growth in MOBs and other specialty health-care real estate has
also expanded dramatically in the past few decades. As RCG observes
in the same 2013 report previously stated:
Evolution in the healthcare industry is also contributing to
opportunities in the medical office space. Driven by shifting
consumer preferences, limited space in hospitals, and lower
costs, procedures that have traditionally been performed in
hospitals, such as surgery, have been moving to outpatient
facilities. Additionally, increased specialization in the medical
field has been driving demand for medical office facilities suited
to the needs of the particular profession.
Risks and Rewards of Health-care REITs
Health-care REITs should continue to benefit from robust demand
for an increased number of health-care facilities required to support
the expanding U.S. population, in as cost-efficient a manner possible.
Where there is growth in demand, there is also the possibility for too
much new supply being built at once. Investors should be aware of
this potential risk when evaluating where different health-care REITs
are building and buying facilities.
Health-care REITs’ tenants are doctors and health-care service
providers, who in turn have varying degrees of exposure to government policy vis-à-vis reimbursement levels for Medicare and Medicaid. Most REITs have minimized their exposure to potential changes
in Medicare and Medicaid reimbursement levels by leasing to tenants that emphasize private-pay care. Even so, health-care REITs’ total
returns remain subject to risk associated with potential reductions to
government Medicare and Medicaid reimbursement rates. Even if
no changes are made, if investors believe reimbursement rate cuts
are possible, all health-care REITs are likely to underperform other
property types.
The final risk to consider when reviewing health-care REITs is
their use of long-term triple-net leases with the tenants who operate
62
The Intelligent REIT Investor
(no pun intended) out of their facilities. In a rising interest rate
environment, REITs that use triple-net leases tend to be valued like
long-term bonds, in that their stock prices typically underperform
other types of REITs that use shorter-term leases. (See Chapter 7 for
more information about the factors that influence REIT share price
performance.)
Industrial REITs
There are 11 industrial property REITs in the FTSE NAREIT All REIT
Index, with combined assets of $60.2 billion (Table 5.7). Industrial
properties are leased to businesses for a variety of purposes, including distribution warehousing, light manufacturing, and research and
development (R&D).
Industrial property is among the most stable, least-volatile asset
classes in the United States. National warehouse/industrial occupancy in the United States typically ranges between 88 percent and
92 percent, evidencing the steady supply-and-demand fundamentals
associated with warehousing and distribution facilities. The fact
that supply of newly constructed industrial property tends to track
demand for new facilities is one of the primary reasons behind the
sector’s stability.
Demand for industrial property is correlated to consumer spending and growth in the country’s gross domestic product (GDP).
Table 5.7 Industrial REITs
Company Name
Prologis, Inc.
Duke Realty Corporation
Liberty Property Trust
DCT Industrial Trust Inc.
First Industrial Realty Trust, Inc.
PS Business Parks, Inc.
STAG Industrial, Inc.
EastGroup Properties, Inc.
Rexford Industrial Realty, Inc.
Terreno Realty Corporation
Monmouth Real Estate
Investment Corporation
Total for 11 REITs:
∗ As
Ticker
Symbol
Total
Assets∗
Website Address
PLD
DRE
LPT
DCT
FR
PSB
STAG
EGP
REXR
TRNO
MNR
$31,395
6,917
6,558
3,632
2,718
2,187
1,906
1,666
1,153
1,152
916
www.prologis.com
www.dukerealty.com
www.libertyproperty.com
www.dctindustrial.com
www.firstindustrial.com
www.psbusinessparks.com
www.stagindustrial.com
www.eastgroup.net
www.rexfordindustrial.com
www.terreno.com
www.mreic.com
of December 31, 2015, in millions of dollars.
Source: NAREIT, S&P Global Market Intelligence.
$60,200
REITs by Property Type
63
The more demand for consumer goods—whether they are purchased at traditional brick-and-mortar locations like malls, or
online with the Internet—the greater the need for warehouses to
store and distribute goods to consumers. Supply increases through
new development. Industrial properties are fairly simple to build,
consisting essentially of four walls tilted up on a six-inch slab of
concrete, with a roof that holds it all together. As such, it typically
takes only six-to-nine months to construct an industrial property
after breaking ground. Due to the relatively short development
cycle, industrial property markets tend not to get overbuilt.
Risks and Rewards of Industrial REITs
The trade-off for the industrial sector’s stability is these REITs do
not enjoy the rapid price appreciation associated with other, more
volatile property sectors. Because industrial property is so essential
to any economy, shares of industrial REITs tend to perform well
throughout the economic cycle. Industrial REITs may not dazzle,
but they also rarely disappoint.
Lease Terms
Industrial property landlords employ triple-net or modified-gross
leases. As explained in Chapter 4, the tenant is responsible for all
of a property’s maintenance, taxes, and insurance in the former
case; in the latter, the landlord/REIT typically pays basic property
taxes and insurance. Lease lengths range from one-to-three years
for small-space users with local distribution needs, and five, seven,
or 10 years+ for larger tenants distributing goods regionally or
nationally. At either end of the spectrum, tenant renewal rates tend
to be high (roughly 65 percent or more), since distribution space is
a critical component of a tenant’s supply chain. (Tenants cannot get
their goods to end users without some degree of warehousing and
distribution.) Industrial leases tend to include rent escalations every
one, two, or three years; these contractual rent bumps typically are
indexed to increase with inflation.
Lodging/Resort REITs
In 2015 there were 20 lodging/resort (hotel) REITs in the
FTSE NAREIT All REITs Index with $61.3 billion of total assets
(Table 5.8). The majority of U.S. hotels are affiliated with national
64
The Intelligent REIT Investor
or international franchises or brands. REITs generally own hotels
branded under the most widely recognized flags, and tend to focus
on the urban markets. Popular brands (and their respective flags)
include Marriott International (Courtyard, Residence Inn), Hilton
(Hilton Garden Inn, Hampton Inn), and InterContinental Hotels
Group (Intercontinental, Holiday Inn). Hotels are frequently
classified by the quality-level of guest services offered, such as luxury,
upper-upscale, upscale, midscale, or economy or by their location
such as urban, suburban, resort, and airport.
Hotel Revenue
Location and quality levels is a key driver of a hotel’s maximum revenue per available room (RevPAR), which is the product of a hotel’s
average daily room rate (ADR) and its occupancy rate. Close proximity to a desirable attraction, such as a beach, a central business
district, a large university, or a convention center can be a competitive advantage, enabling an operator to charge higher room rates and
maintain higher occupancies than hotels that operate in secondary
locations. The latter tend to be roadside, limited- or economy-service
hotels that compete primarily on price.
Hotel Expenses
Labor represents the most significant expense in hotel operations. As
a result, hotels will have large fixed costs to operate the hotel since
a minimum number of employees are required to open, run, and
clean a hotel each day, regardless of occupancy levels. For this reason, hotels often reduce room rates to increase occupancy during
off-seasons or in slow to declining economic times.
Technical Aspects Specific to Hotel REITs
Hotel REITs differ structurally from other equity REITs in that,
according to REIT rules (see Chapter 6), hotel owners are not
permitted to directly operate the properties they own. This is
because earning profit from operating hotels is active and differs
from the more passive business of collecting rent on hotels leased
to third-party operators. As a result, hotel REITs must retain a
third-party hotel manager to operate its hotels. The third-party hotel
manager is in charge of all operating facets of the hotel, including
hiring and managing the employees, revenue management, and
maintenance. In exchange, the third-party manager receives a base
65
HST
HPT
AHT
LHO
RLJ
SHO
APLE
DRH
PEB
XHR
RHP
CHSP
HT
FCH
INN
AHP
CLDT
SOHO
CDOR
IHT
Ticker Symbol
As of December 31, 2015, in millions of dollars.
Source: NAREIT, S&P Global Market Intelligence.
∗
Host Hotels & Resorts, Inc.
Hospitality Properties Trust
Ashford Hospitality Trust, Inc.
LaSalle Hotel Properties
RLJ Lodging Trust
Sunstone Hotel Investors, Inc.
Apple Hospitality REIT, Inc.
DiamondRock Hospitality Company
Pebblebrook Hotel Trust
Xenia Hotels & Resorts, Inc.
Ryman Hospitality Properties, Inc.
Chesapeake Lodging Trust
Hersha Hospitality Trust
FelCor Lodging Trust Incorporated
Summit Hotel Properties, Inc.
Ashford Hospitality Prime, Inc.
Chatham Lodging Trust
SoTHERLY Hotels Inc.
Condor Hospitality Trust, Inc.
InnSuites Hospitality Trust
Total for 20 REITs:
Company Name
Table 5.8 Lodging/Resort REITs
$11,784
6,408
4,965
4,075
3,980
3,863
3,723
3,320
3,063
3,006
2,331
2,094
1,970
1,884
1,581
1,353
1,340
393
144
27
$61,304
Total Assets∗
Full-service Hotel
Limited-service Hotel
Full-service Hotel
Full-service Hotel
Full-service Hotel
Full-service Hotel
Hotel
Hotel
Hotel
Hotel
Full-service Hotel
Full-service Hotel
Limited-service Hotel
Full-service Hotel
Limited-service Hotel
Hotel
Hotel
Full-service Hotel
Limited-service Hotel
Limited-service Hotel
NAREIT Sub-Property Type
www.hosthotels.com
www.hptreit.com
www.ahtreit.com
www.lasallehotels.com
www.rljlodgingtrust.com
www.sunstonehotels.com
www.applehospitalityreit.com
www.drhc.com
www.pebblebrookhotels.com
www.xeniareit.com
www.rymanhp.com
www.chesapeakelodgingtrust.com
www.hersha.com
www.felcor.com
www.shpreit.com
www.ahpreit.com
www.chathamlodgingtrust.com
www.sotherlyhotels.com
www.condorhospitality.com
www.innsuitestrust.com
Website Address
66
The Intelligent REIT Investor
management fee (typically 2 to 4 percent of hotel revenues) plus
potentially an incentive fee if certain profitability thresholds are
achieved. Hotel REITs generally will retain asset managers to oversee
the third-party hotel manager.
Risks and Rewards of Hotel REITs
Hotels are more like an operating company than a REIT because
they have no leases to guarantee future revenues for some duration
of time. Instead, hotel REITs have to “lease” their properties from
scratch every day. During times of strong economic growth, hotels
can increase prices immediately; as a result, during certain points
in the economic cycle, hotel REITs can achieve some of the highest
annual total returns of any property type (see Chapter 7 for more
detail). In addition, since the lease rate for hotel rooms can be
reset daily, in a rising inflationary economy, hotel REITs have an
advantage as they can reprice their “leases” daily. As a result, hotel
REITs tend to be the least interest rate sensitive class of investment
real estate. When it looks like the economy is coming out of a
recession, hotel REITs tend to outperform other REIT asset classes,
as investors anticipate strong revenue growth and profitability. In
a declining economy, however, hotel operators often have to cut
their daily rates, and a portion of their employees, to maintain profitability. Unsurprisingly, hotel REITs tend to underperform other
REIT sectors when the economy is slowing or at risk of slipping into
recession.
Mortgage REITs
The FTSE NAREIT All REITs index listed 41 mortgage REITs (mREITs) at the end of 2015. Early in 2016, a 42nd mREIT was added,
bringing the subsector to a total of 42 mREITs with combined
assets of $457.2 billion (Table 5.9). Similar to banks and other
financial institutions, mREITs lend money to real estate owners
directly by issuing mortgages, or indirectly by acquiring existing
loans or mortgage-backed securities. In contrast with equity REITs
that derive the majority of their revenues from leases, mREIT
revenue equals the principal and interest payments received from
real estate-based loans.
Mortgage REITs originate residential and commercial mortgages, and they also invest in securities backed by residential
REITs by Property Type
67
Table 5.9 Mortgage REITs
Company Name
Ticker
Symbol
Total
Assets∗
Home Financing:
Annaly Capital Management
American Capital Agency Corp
Invesco Mortgage Capital
NLY
AGNC
IVR
Hatteras Financial
Chimera Investment
New Residential Investment Corp
Two Harbors Investment
HTS
CIM
NRZ
TWO
Capstead Mortgage
CYS Investments
MFA Financial
ARMOUR Residential REIT
New York Mortgage Trust
Anworth Mortgage Asset
Redwood Trust
PennyMac Mortgage Investment Trust
CMO
CYS
MFA
ARR
NYMT
ANH
RWT
PMT
American Capital Mortgage Investment
Dynex Capital
Apollo Residential Mortgageb
MTGE
DX
AMTG
Western Asset Mortgage Capital
AG Mortgage Investment Trust
Five Oaks Investment Corp
Altisource Residential
Orchid Island Capital
Ellington Residential Mortgage REIT
JAVELIN Mortgage Investmentb
ZAIS Financial Corp
Cherry Hill Mortgage Investment
Great Ajax
Subtotal for 28 Residential Mortgage REITs:
WMC
MITT
OAKS
RESI
ORC
EARN
JMI
ZFC
CHMI
AJX
$75,191 www.annaly.com
57,021 www.agnc.com
16,773 www.invescomortgage
capital.com
16,138 www.hatfin.com
15,345 www.chimerareit.com
15,193 www.newresi.com
14,576 www.twoharborsinvestment
.com
14,446 www.capstead.com
14,331 www.cysinv.com
13,167 www.mfafinancial.com
13,055 www.armourreit.com
9,060 www.nymtrust.com
6,636 www.anworth.com
6,231 www.redwoodtrust.com
5,827 www.pennymac
mortgageinvestmenttrust
.com
5,482 www.mtge.com
3,670 www.dynexcapital.com
3,663 www.apolloresidential
mortgage.com
3,415 www.westernassetmcc.com
3,164 www.agmit.com
2,498 www.fiveoaksinvestment.com
2,458 www.altisourceresi.com
2,242 www.orchidislandcapital.com
1,557 www.earnreit.com
874 www.javelinreit.com
775 www.zaisfinancial.com
$636 www.chmireit.com
615 www.great-ajax.com
$324,039
Commercial Financing:
Starwood Property Trust Inc
STWD
Colony Capital
Blackstone Mortgage Trust
CLNY
BXMT
Ladder Capital Corpa
LADR
Website Address
$85,738 www.starwoodpropertytrust
.com
10,039 www.colonyinc.com
9,377 www.blackstonemortgage
trust.com
5,895 www.laddercapital.com
(continued overleaf )
68
The Intelligent REIT Investor
Table 5.9 (continued)
Company Name
Ticker
Symbol
Total
Assets∗
iStar Inc
RAIT Financial Trust
Resource Capital
STAR
RAS
RSO
$5,623
4,447
2,760
Apollo Commercial Real Estate Financeb
Arbor Realty Trust
Hannon Armstrong Sustainable Infrastructure
Newcastle Invt Corp
Ares Commercial Real Estate
Owens Realty Mortgage Inc
Jernigan Capital
Subtotal for 14 Commercial Mortgage REITs:
Total for 42 Mortgage REITs:a
ARI
ABR
HASI
NCT
ACRE
ORM
JCAP
2,720
1,827
1,470
1,468
1,379
273
105
133,122
$457,161
Website Address
www.istar.com
www.rait.com
www.resourcecapitalcorp
.com
www.apolloreit.com
www.arborrealtytrust.com
www.hannonarmstrong.com
www.newcastleinv.com
www.arescre.com
www.owensmortgage.com
www.jernigancapital.com
∗
As of December 31, 2015, in millions of dollars.
was not included in the FTSE NAREIT All REITs Index at 12/31/2015, but was added in 2016. At the
end of 2015, there were only 41 mREITs in the FTSE NAREIT All REITs Index.
b
In February 2016, AMTG agreed to be acquired by ARI.c.
b This REIT is in the process of being acquired and will not remain publicly traded.
Source: NAREIT, S&P Global Market Intelligence.
a LADR
Note
mREITs will not be included in S&P’s Real Estate GICS sector; they
will remain in Financials.
mortgages (RMBS) and commercial mortgages (CMBS). A mortgage-backed security (MBS) is a bond-like investment, supported by
interest income generated by an underlying mortgage or collection
of mortgages. The MBS issuer typically is a government agency
or investment bank that purchases the loan(s) and then securitizes
(or packages) them into loan-like securities that appeal to different
investors. The purpose of creating these “loans from loans” is to
diversify the risk of one borrower by pooling loans together or, in
the case of an MBS based on one loan, to restructure the interest
and principal payments so investors can buy a piece of the loan with
a lower (or higher) risk profile to meet their investment objectives.
REITs by Property Type
69
Mortgage REITs typically focus on either the residential or commercial mortgage markets. According to NAREIT:
• Most residential mREITs invest in agency RMBS, which are
issued by Fannie Mae and Freddie Mac, often referred to as
U.S. government–sponsored enterprises (GSEs), or Ginnie
Mae. Agency RMBS constitute the bulk of assets held by
mREITs today. However, residential mREITs also may invest
in RMBS issued by other financial institutions (nonagency or
private-label RMBS) and residential mortgage loans.
• Commercial mREITs provide financing for commercial real
estate. They may invest in commercial mortgages and commercial real estate loans, as well as both rated and unrated
CMBS, mezzanine loans, subordinated securities, or construction loans, and may participate in loan securitizations.
Risks and Rewards of Mortgage REITs
Because mREITs lend money at one rate and borrow it at another,
their profitability is affected by changes in the interest rate environment. (Note that increases in interest rates do not directly affect
equity REIT profitability. See Chapter 7, REIT Performance, for
more detail.) Like banks, mREITs generally make higher profits in
a higher-interest-rate environment, where the difference (or spread)
between where they can borrow and where they lend funds may be
greater. However, if interest rates rise rapidly and/or unexpectedly,
mREIT profitability can get squeezed because the rate at which
management now needs to borrow is higher than the rates at which
they have already invested. Most mREIT management teams are
Basics of Investing in mREITs
• Rising interest rates = Margin on investments vs. cost of funds
declines; profits fall → Avoid!
• Falling interest rates = Higher prepayments; profits likely to
fall → Avoid!
• Stable interest rates = Steady profits → Okay to Invest
70
The Intelligent REIT Investor
diligent about matching durations between their loans receivable
and those that are payable. Although duration match-funding mitigates exposure to interest rate increases, investors won’t truly know
how good (or bad) a job management has done until it may be too
late to avoid unexpected losses.
Mortgage REIT profitability can also be challenged in a falling
interest rate environment. When rates fall, mortgages and businesses
refinance debt at lower interest rates. Such prepayment activity will
alter the cash flows of the MBS in which mortgage REITs may
have invested and dampen the resulting yield. Because mREIT
profitability can be challenged by any change in interest rates,
investors are better served to invest in these REITs only when they
feel confident that the interest rate environment will be stable
during their investment period.
Office REITs
In 2015, NAREIT listed 28 companies as office REITs, with total assets
of $145.6 billion (Table 5.10). Office REITs own everything from
high-rise buildings in major metropolitan areas such as New York
City, to low- and mid-rise suburban office space in secondary office
markets such as Charlotte, North Carolina. Within each market, location plays a major role in determining current rental rates, future
rent increases, and property occupancy. Depending on the market,
properties located in a city’s central business district (CBD) may garner higher rents than suburban locations due to proximity to public
transportation lines, industry resources, and/or the labor force targeted by corporations doing business there. In contrast, suburban
office buildings may be attractive to tenants because of their location
relative to executive housing, ample parking, and worker preference
to drive to work.
Office buildings are also classified based on building quality
(construction and materials), conditions of their mechanical
and other internal systems, in-building amenities (such a gym or
restaurant), and location. Newer buildings typically are deemed
to be Class-A properties. Older buildings that have less efficient
mechanical and electrical systems, or that are simply less aesthetically pleasing, tend to be classified as Class-B or Class-C. Although
these ratings are subjective and vary from market to market, they
REITs by Property Type
71
Table 5.10 Office REITs
Company Name
Ticker
Symbol
Boston Properties, Inc.
SL Green Realty Corp.
Paramount Group, Inc.
Alexandria Real Estate Equities
BioMed Realty Trust, Inc.†
Hudson Pacific Properties, Inc.
BXP
SLG
PGRE
ARE
BMR
HPP
$18,379
19,858
8,794
8,911
6,461
6,254
Douglas Emmett, Inc.
Kilroy Realty Corporation
Gramercy Property Trust Inc.a
Equity Commonwealth
Select Income REIT
Columbia Property Trust, Inc.
Brandywine Realty Trust
Highwoods Properties, Inc.
Piedmont Office Realty Trust
Mack-Cali Realty Corporation
Corporate Office Properties Tr
Parkway Properties, Inc.b
Empire State Realty Trust, Inc.
NorthStar Realty Europe
Cousins Properties
Incorporatedb
Government Properties Inc Tr
New York REIT, Inc.
Franklin Street Properties
TIER REIT, Inc.
First Potomac Realty Trust
Easterly Government
Properties, Inc.
City Office REIT, Inc.
Total for 28 REITs:
DEI
KRC
GPT
EQC
SIR
CXP
BDN
HIW
PDM
CLI
OFC
PKY
ESRT
NRE
CUZ
6,066
5,939
5,841
5,244
4,696
4,678
4,555
4,493
4,435
4,063
3,909
3,619
3,301
2,683
2,598
www.bostonproperties.com
www.slgreen.com
www.paramount-group.com
www.are.com
www.biomedrealty.com
www.hudsonpacificproperties
.com
www.douglasemmett.com
www.kilroyrealty.com
www.gptreit.com
www.eqcre.com
www.sirreit.com
www.columbiapropertytrust.com
www.brandywinerealty.com
www.highwoods.com
www.piedmontreit.com
www.mack-cali.com
www.copt.com
www.pky.com
www.empirestaterealtytrust.com
www.nrecorp.com
www.cousinsproperties.com
GOV
NYRT
FSP
TIER
FPO
DEA
2,175
2,072
1,921
1,874
1,450
912
www.govreit.com
www.nyrt.com
www.franklinstreetproperties.com
www.tierreit.com
www.first-potomac.com
www.easterlyreit.com
CIO
Total
Assets∗
444
$145,626
Website Address
www.cityofficereit.com
∗ As
of December 31, 2015, in millions of dollars.
January 2016, BioMed Realty Trust (former NYSE: BMR) was taken private.
a
In December 2015, Gramercy acquired Chambers Street Properties (former NYSE: CSG).
b In April 2016, Parkway Properties and Cousins Properties announced they will merge; the transaction is
expected to be complete before the end of the year.
Source: NAREIT, S&P Global Market Intelligence.
† In
are useful for benchmarking rents and property values on a local,
regional, or national level. It is possible, for example, to have a
Class-A building in a B or C market, and, therefore, only achieve
rents that are competitive with other Class-B or -C buildings.
72
The Intelligent REIT Investor
Lease Terms
Office leases typically are full-service leases with an initial term of five
to seven years, plus one or more multiple-year renewal options. In a
full-service lease (see Chapter 4, Leases), the landlord is responsible
for all the operating expenses of the property, including landscaping,
real estate taxes, and insurance, but generally the landlord is able to
pass most expenses back to the tenant in the form of the expense
stops associated with the full-service lease, and common-area maintenance, or CAM, charges. Office leases commonly include annual
rent escalations (also called bumps or stepups) that insulate the landlord’s profit margin from costs that rise with inflation.
Risks and Rewards of Office REITs
Office REIT returns are more cyclical than the average equity
REIT’s due to periodic overbuilding. (Also see Chapter 7, REIT
Performance.) If demand for new space does not keep pace with
the increase in supply, office vacancy in that market will rise and
rental rates will decline. The office sector’s longer building cycle
is a primary contributing factor to historical overbuilding. During
the two or more years it generally takes to complete an office tower,
local demand for office space, which is a function of job growth and
the local economy, can change materially and cause a building to sit
vacant or mostly vacant until demand for office space recovers.
The way tenants use their space can also dramatically alter
demand for office space, even in a growing economy. The advancement in communications over the past two decades has made
working from home a viable alternative for some workers. Although
not all office cultures or industries lend themselves to allowing
workers to perform their duties offsite, the ability to work remotely
has dampened the overall need for office space in most locations.
Densification is a second trend that has dramatically reduced the
need for office space in the past 15 years. In 2000, employers
generally budgeted 250 square feet of space per employee. Today,
the range is between 125 and 225 square feet per employee and
an average of around 175 square feet per employee, representing
an average decrease in demand of 30 percent. Densification, which
is simply space planning more employees into the same square
REITs by Property Type
73
feet of office space, has largely run its course, to the relief of office
landlords. However, the way people use—or don’t use—formal office
space to do their jobs is an ongoing challenge the office property
sector faces.
Residential REITs
The residential REIT sector encompassed 23 REITs at the end of
2015 with total assets of $123.6 billion. There are three subcategories
of residential REITs: apartments (or multifamily), manufactured
homes, and single-family homes.
Apartment REITs
NAREIT lists 16 apartment REITs with total assets of $93.4 billion
(Table 5.11). Historically, apartment REITs included only companies that owned traditional apartment buildings. More recently, however, the group expanded to include REITs that own student housing
apartment complexes.
Traditional apartment buildings are classified as either gardenstyle or high-rise buildings. Garden-style apartments contain
multiple buildings that usually are one to four stories in height
and are configured around the center of the community, typically
a pool or other common area(s). High-rise apartment buildings
are just that: high-rise buildings that contain apartments. High-rise
apartments typically are built in high-density cities or town centers
where the cost of land and the monthly rental rates the landlord can
charge support the additional cost per square foot associated with
high-rise construction.
In both formats, apartment properties generally contain a mix
of studio, one-, and two-bedroom apartment units. Properties also
are classified as Class-A, B, or C. Class-A buildings include newer
buildings in prime locations. Buildings in Class-B and C categories
tend to be older, offer residents fewer amenities, and, perhaps, are
located in less desirable locations. Rental agreements for apartment
units typically are for 12 months at a time. A tenant generally may
cancel a lease, however, by providing one or more months’ notice,
typically in writing. The landlord is responsible for the cost of
74
The Intelligent REIT Investor
Table 5.11 Apartment REITs
Company Name
Ticker
Symbol
Total
Assets∗
Website Address
EQR
AVB
ESS
UDR
MAA
AIV
$23,157
16,931
12,005
7,664
6,848
6,144
www.equityapartments.com
www.avalonbay.com
www.essex.com
www.udr.com
www.maac.com
www.aimco.com
6,038
6,026
3,283
www.camdenliving.com
www.americancampus.com
www.MonogramResidential
Trust.com.
www.postproperties.com
www.edrtrust.com
www.campuscrest.com
www.irtreit.com
www.pacapts.com
www.nexpointliving.com
www.bluerockresidential
.com
Equity Residential
AvalonBay Communities, Inc.
Essex Property Trust, Inc.
UDR, Inc.a
MAAb
Apartment Investment and
Management Companyc
Camden Property Trust
American Campus Communities, Inc.
Monogram Residential Trust, Inc.
CPT
ACC
MORE
Post Properties, Inc.
Education Realty Trust, Inc.
Campus Crest Communities†
Independence Realty Trust, Inc
Preferred Apartment Communities, Inc.
NexPoint Residential Trust, Inc.
Bluerock Residential Growth REIT, Inc.
PPS
EDR
CCG
IRT
APTS
NXRT
BRG
Total for 16 REITs:
2,272
2,002
1,584
1,392
1,296
976
703
_______
$98,321
∗
As of December 31, 2015, in millions of dollars.
will be added to the S&P 500 Index in 2016.
b
Formerly called Mid-America Apartment Communities, Inc.
c This REIT most commonly goes by “Aimco” but has not changed its name officially.
† This company was taken private in January 2016. Assets shown are as of September 30, 2015.
Source: NAREIT, S&P Global Market Intelligence.
a UDR
maintaining the property; however, similar to a full-service lease, the
tenant’s rent essentially covers costs paid by the landlord. Except
in properties where it is possible to meter individual utilities, a
landlord also factors into the rental rate reasonable costs for water
and heating, ventilation, and air conditioning (HVAC) services.
Steady Demand for Apartment Units
Similar to office space, demand for apartments is highly correlated
with employment trends. As employment in an area increases,
demand for apartments to house new workers who in-migrate to
that area also increases. In contrast to the office sector, demand
REITs by Property Type
75
for apartments also increases when employment decreases, as some
former homeowners sell their houses and go back to renting.
When unemployment rises, apartment landlords tend to decrease
monthly rents and/or offer concessions in the form of months of free
rent and, depending on local competition, free garage parking and
fitness center memberships in order to maintain occupancy levels.
When the economy recovers and is expanding, apartment landlords
take advantage of their shorter lease lengths to increase rents
more aggressively each year and quickly stop offering concessions
to attract or retain tenants.
Risks and Rewards of Apartment REITs
Because demand for apartments tends to be fairly steady, the main
risk associated with this sector is the risk of oversupply. As rental
rates for apartments increase, private developers and public REITs
tend to develop more apartment buildings to take advantage of
strong demand. As with any property type, too much supply results
in lower rental rates and/or occupancy levels in a market. This in
turn usually leads to a decline in the stock prices of apartment REITs
with meaningful exposure to the market(s) viewed as becoming
overbuilt.
Manufactured Housing REITs
There are only three manufactured housing REITs, with combined assets of $8.2 billion (Table 5.12). Commonly known as
mobile homes, manufactured housing communities are a lower-cost
Table 5.12 Manufactured Housing REITs
Company Name
Sun Communities, Inc.
Equity LifeStyle Properties, Inc.
UMH Properties, Inc.
Total for 3 REITs:
∗
Ticker
Symbol
Total
Assets∗
SUI
ELS
UMH
$4,191
3,420
604
$8,215
As of December 31, 2015, in millions of dollars.
These REITs generally use ground leases.
Source: NAREIT, S&P Global Market Intelligence.
Website Address
www.suncommunities.com
www.equitylifestyle.com
www.umh.com
76
The Intelligent REIT Investor
alternative to homeownership, which makes them popular among
retirees and lower-income workers. REITs in this property niche
own land that is rented to individuals pursuant to a ground lease.
Tenants purchase prefabricated houses that are placed in an
approved location within the community. In addition to providing
sites for houses, newer manufactured home communities may
also include community-focused amenities, such as lighted streets,
swimming pools, and a community recreation facility or clubhouse.
The landlord (REIT) receives a monthly fee from each tenant for
the right to locate his home on the property. Although individuals
technically could move out in any given month, the relatively
high cost associated with moving the residence to a competing
community tends to translate into a very high renewal rate and in
turn a fairly stable income stream to the landlord.
Single-Family-Home REITs
At the end of 2015, there were four REITs that own single-family
houses for rent, which NAREIT recently carved out of specialty REITs
and placed into their own subproperty type called single-family-home
REITs (Table 5.13). (Note in Table 5.13 that two of these four companies are merging in 2016.) This subcategory of residential REITs grew
out of the business opportunity the Great Recession of 2008–2009
presented to buy houses at deeply discounted prices and lease them
back to the former owners or new occupants.
Table 5.13 Single-Family Home REITs
Company Name
Colony Starwood Homesa
American Homes 4 Rent†
American Residential
Properties, Inc.†
Silver Bay Realty Trust Corp.
Total for 4 REITs:
∗
Ticker
Symbol
Total
Assets∗
SFR
AMH
ARPI
$7,700
6,808
1,359
SBY
1,224
$17,091
Website Address
www.colonystarwood.com
www.americanhomes4rent.com
www.amresprop.com/Home
www.silverbayrealtytrustcorp.com
As of December 31, 2015, in millions of dollars.
These REITs generally use triple-net leases.
a In January 2016, Starwood Waypoint Residential Trust (former NYSE: SWAY) merged with Colony American Homes. Assets shown are estimated, based on September 30, 2015 balance sheet data.
† In February 2016, these two REITs merged. Assets for ARPI are as of September 30, 2015.
Source: NAREIT, S&P Global Market Intelligence.
REITs by Property Type
77
Retail REITs
In 2015, the retail REIT sector included 34 REITs with combined
assets of $192.3 billion. NAREIT tracks three subcategories of retail
REITs: 19 shopping center REITs with $71.7 billion of assets, eight
regional mall REITs with $86.8 billion of assets, and seven freestanding retail REITs with total assets of $33.7 billion.
Initial lease terms to anchor tenants—the larger box tenants
used to draw traffic to the retail center—generally are negotiated for
15 to 20 years. Inline tenants are the smaller shops in a center and
generally lease their space for 5 to 10 years. Retail landlords typically
employ net or modified gross leases (please refer to Chapter 4,
Leases). Retail landlords also may receive percentage rents in
addition to their face rents and CAM fees. Percentage rents are
calculated as a portion (typically 1 to 2 percent) of revenue a tenant
achieves in any given year above the base (or initial) year revenue.
For example, assume Tenant A generates revenue of $100 per square
foot (PSF) during the first year of its lease. If Tenant A generates
$110 in revenue PSF in the following year and the landlord has
negotiated to receive 1 percent of rents above the base-year revenue,
then the landlord will receive an additional $0.10 PSF in percentage
rents. During times of economic expansion, landlords can enhance
the overall yield on their properties from percentage rents. When
economic growth slows or contracts, however, the landlord may
receive no percentage rents, which would represent downside risk
to the retail REIT’s earnings.
Shopping Center REITs
The term shopping center encompasses a range of formats, from
grocery store–anchored neighborhood and community centers to
power centers. According to the International Council of Shopping
Centers (ICSC), shopping centers range in size from 30,000 to
150,000 square feet and serve the area within a three-mile radius
of their locations. Table 5.14 shows the 19 shopping center REITs
tracked by NAREIT.
Neighborhood and community centers are among the most
defensive property types because, if they are well located, they
remain well leased regardless of broader economic trends. Anchor
tenants at shopping centers generally are grocery or drugstores,
78
The Intelligent REIT Investor
Table 5.14 Shopping Center REITs
Ticker
Symbol
Total
Assets∗
Kimco Realty Corporation
Brixmor Property Group Inc.
DDR Corp.
Federal Realty Investment Trust
Retail Properties of America, Inc.
Regency Centers Corporation
KIM
BRX
DDR
FRT
RPAI
REG
$11,344
9,498
9,097
4,912
4,621
4,191
Weingarten Realty Investors
Kite Realty Group Trust
Equity One, Inc.
Acadia Realty Trust
Tanger Factory Outlet Centers, Inc.
Retail Opportunity Investments Corp.
Ramco-Gershenson Properties Trust
Urban Edge Properties
Inland Real Estate Corporation†
WRI
KRG
EQY
AKR
SKT
ROIC
RPT
UE
IRC
3,902
3,766
3,376
3,032
2,327
2,311
2,129
1,919
1,522
Cedar Realty Trust, Inc.
CDR
1,322
Company Name
Saul Centers, Inc.
Urstadt Biddle Properties Inc.
Wheeler Real Estate Investment Trust, Inc.
Total for 19 REITs:
BFS
UBA
WHLR
1,304
861
314
$71,747
Website Address
www.kimcorealty.com
www.brixmor.com
www.ddr.com
www.federalrealty.com
www.rpai.com
www.regencycenters
.com
www.weingarten.com
www.kiterealty.com
www.equityone.net
www.acadiarealty.com
www.tangeroutlet.com
www.roireit.net
www.rgpt.com
www.uedge.com
www.inlandrealestate
.com
www.cedarrealtytrust
.com
www.saulcenters.com
www.ubproperties.com
www.whlr.us
∗ As
of December 31, 2015, in millions of dollars.
REIT was taken private in January 2016 and is no longer public.
Source: NAREIT, S&P Global Market Intelligence.
† This
designed to draw traffic to the center. Shopping center inline
tenants tend to sell necessary consumer items and services, such as
dry cleaning and shoe repair. As a result, demand for neighborhood
and community shopping center space tends to be fairly stable (or
inelastic), as evidenced by their high historical occupancy rates that
typically range between 89 and 94 percent. Similar to industrial
properties, new supply of shopping centers tends to track demand
due to the short development time.
Power centers consist only of big-box, national retailers such as
Bed Bath & Beyond, Petco, Dick’s Sporting Goods, and Home Depot.
According to ICSC, the average power center is between 250,000 and
600,000 square feet and has a primary trade area of 5 to 10 miles.
REITs by Property Type
79
Although the goods sold at these stores are everyday in nature,
they tend not to be true necessity items. Consumers, therefore, may
substitute less-expensive brands during an economic downturn. Part
of the major draw to power centers, however, is the convenience of
shopping at a center that offers a series of anchor tenants clustered
in one location.
Mall REITs
Malls are classified as regional or super-regional, depending on how
large they are and what population base they serve. According to
ICSC, regional malls are generally between 400,000 and 800,000
square feet in size and have at least two anchor tenants, such as
Nordstrom (NYSE: JWN). Super-regional malls are at least 800,000
square feet in size, have at least three anchor tenants, at least one
of which offers luxury and/or fashion goods, such as Neiman
Marcus; and super-regional malls are the dominant shopping venue
within a 25-mile radius. Malls also are classified as being Class-A
or Class-B in quality, depending on location, the anchor tenants,
average household income in the surrounding trade area, all of
which influence a mall’s sales per square foot—an essential metric
for comparing productivity among different malls. Table 5.15 shows
the eight regional mall REITs tracked by NAREIT.
Table 5.15 Mall REITs
Company Name
Simon Property Group, Inc.
General Growth Properties, Inc.
Macerich Company
CBL & Associates Properties, Inc.
WP Glimcher Inc.
Taubman Centers, Inc.
Pennsylvania REIT
Rouse Properties, Inc.†
Total for 8 REITs:
∗ As
Ticker
Symbol
Total
Assets∗
SPG
GGP
MAC
CBL
WPG
TCO
PEI
RSE
$30,651
24,074
11,259
6,480
5,479
3,563
2,807
2,529
$86,841
Website Address
www.simon.com
www.ggp.com
www.macerich.com
www.cblproperties.com
www.wpglimcher.com
www.taubman.com
www.preit.com
www.rouseproperties.com
of December 31, 2015, in millions of dollars.
In January 2016, a private equity firm made an unsolicited offer to take Rouse Properties private; accordingly, this REIT is not likely to remain publicly traded.
Source: NAREIT, S&P Global Market Intelligence.
†
80
The Intelligent REIT Investor
Anchor tenants may lease their space, though many prefer to
own their stores. Since a landlord selects an anchor tenant primarily for that tenant’s ability to draw consumers to the mall itself, the
choice of anchor tenants is crucial to the overall success of a project.
In between anchor tenants are smaller retailers referred to as inline
shops. These tenants include national retailers such as The Gap, as
well as regional and local retailers. Malls typically are located in close
proximity to or within major metropolitan areas and/or areas that
have above-average household income levels in order to maximize
sales per square foot and profitability.
Freestanding Retail REITs
Freestanding retail properties house a wide array of businesses,
including fast-food and sit-down restaurants (such as Burger King
and Macaroni Grill, respectively), drugstores, movie theaters,
day-care services, automotive care, and gas stations. REITs that own
freestanding retail properties typically use triple-net leases with
their tenants (see Chapter 4, Leases). By using triple-net leases, the
tenants have full control over their property operations, including
staying open late or all night for business. Alternatively, if these
tenants rented space in a shopping center or mall, they would be
subject to that center’s operating hours and other criteria. NAREIT
tracks seven freestanding retail REITs, as shown in Table 5.16.
Table 5.16 Freestanding Retail REITs
Company Name
Realty Income Corporation
Spirit Realty Capital, Inc.
National Retail Properties
STORE Capital Corp
Seritage Growth Properties
Getty Realty Corp.
Agree Realty Corporation
Total for 7 REITs:
∗
Ticker
Symbol
Total
Assets∗
O
SRC
NNN
STOR
SRG
GTY
ADC
$11,866
7,919
5,460
3,911
2,833
899
793
$33,681
NAREIT
Sub-Property
Type
Website Address
Single-Tenant
Diversified
Single-Tenant
Diversified
Other Retail
Single-Tenant
Single-Tenant
www.realtyincome.com
www.spiritrealty.com
www.nnnreit.com
www.storecapital.com
www.seritage.com
www.gettyrealty.com
www.agreerealty.com
As of December 31, 2015, in millions of dollars.
These REITs generally use long-term triple-net leases and/or ground leases.
Source: NAREIT, S&P Global Market Intelligence.
REITs by Property Type
81
In the past few years, three of the freestanding retail REITs listed
in Table 5.16 (Seritage, Spirit, and STORE) joined the ranks of publicly traded REITs. Growth in this once sleepy subcategory of retail
REITs is being fueled by increased comfort tenants have gained to
lease rather than own their real estate. In a sale/leaseback transaction, an owner that occupies a property sells the building to a new
owner/landlord, then leases back that same space, typically using a
long-term triple-net lease. An increasing number of businesses are
willing to monetize their real estate holdings through sale/leaseback
transactions with REITs. By doing so, the businesses free up precious
capital to deploy back into their operations while still maintaining
fundamental control over their locations.
Risks and Rewards of Retail REITs
As the 2015 holiday shopping season evidenced, consumers increasingly are shopping for gifts and necessary items online rather than
in retail stores. Internet sales, often referred to as e-commerce, are
encroaching on the profitability of traditional brick-and-mortar
stores. In January 2016, for example, in the wake of weak holiday
sales, Walmart Stores (NYSE: WMT) announced it would close 269
stores worldwide in 2016, including 154 in the United States, to
focus on its supercenters and e-commerce business. Similarly, Macy’s
(NYSE: M) announced it would close 36 stores. As e-commerce proliferates, retailers—and the REITs who act as their landlords—will
need to innovate to retain market share and profitability. One effective strategy retail REITs use to mitigate the risk of losing tenants
and market share to e-commerce retailers, such as Amazon.com,
Inc. (NASDAQ: AMZN), is to own the most attractive locations,
often measured by the average household and discretionary income
levels within a one-, three-, or five-mile radius of retail centers.
Such attractive locations tend to support higher sales per square
foot leased for their tenants, meaning the space they rent is more
productive and profitable than secondary locations. When retailers
close stores, they close their least productive ones. A second strategy
landlords use to maintain the revenue per square foot at their
centers is to lease space to tenants that offer necessary items (such as
groceries and dry cleaning) or, at the other end of the consumption
spectrum, luxury goods.
82
The Intelligent REIT Investor
Self-Storage REITs
The FTSE NAREIT All REITs Index classifies five companies as
self-storage REITs with combined assets of $22.2 billion (Table 5.17).
Similar to what drives the apartment sector, demand for self-storage
units is driven by population growth, people moving locations for
jobs or other reasons, as well as the urge many people have to
archive things for future generations or the simple inability to throw
anything away. Individuals who rent apartments or who live in condominiums tend to rent self-storage space. Customers select storage
facilities based on price, location, security, and suitability of space
to their needs. Property owners rarely depend on one customer for
large portions of revenue because individual consumers (rather than
businesses) represent the majority of self-storage users. The storage
units themselves are simple structures located near busy roads in
order to ensure visibility. They require little capital expenditures
outside of roof or parking lot/pavement repairs.
Risks and Rewards of Self-Storage REITs
Self-storage units are rented on a month-to-month basis, which
can create volatility in rental rates during times of weak or robust
demand. Historically, oversupply had been the primary risk associated with this sector. Although the facilities take little time to
construct, highly fragmented ownership historically led to less
Table 5.17 Self-Storage REITs
Company Name
Public Storage
Extra Space Storage Inc.†
CubeSmart
Sovran Self Storage, Inc.
National Storage Affiliates Trust
Total for 5 REITs:
∗ As
Ticker
Symbol
Total
Assets*
PSA
EXR
CUBE
SSS
NSA
$9,778
6,071
3,115
2,122
1,102
$22,189
Website Address
www.publicstorage.com
www.extraspace.com
www.cubesmart.com
www.unclebobs.com
www.nationalstorageaffiliates.com
of December 31, 2015, in millions of dollars.
In 2016, Extra Space Storage will be added to the S&P 500 Index.
Source: NAREIT, S&P Global Market Intelligence.
†
REITs by Property Type
83
transparent supply-and-demand information than for other commercial property types. As the REITs in this space have grown by
acquiring local operators, the sector’s supply issues have waned and
the sector has tended to outperform other property types.
Conclusion
REIT performance varies by property sector, as each type of real
estate is impacted differently by larger economic trends. Chapter 7
provides a more in-depth analysis of REIT performance, including a
comparison by property sector.
Part II
Investing in REITs
Part II of this book builds on the basic information conveyed
in Part I. Chapters 6 through 8 are for investors who want to take
their academic understanding of REITs accumulated in Chapters 1
through 5 and apply it to actual companies for investment purposes.
This includes money managers who are new to REITs, as well as
financial advisors who want to better serve their clients by mastering
the basics of REIT analysis.
85
6
C H A P T E R
Getting Technical
B
efore discussing factors that influence REIT performance in
Chapter 7 and the various metrics used to analyze REITs in Chapter 8,
there are a few technical items specific to REITs that are helpful to
understand.
REIT Structures
As discussed at the outset of this book, REITs are companies that own
or finance income-producing commercial real estate. The majority
of REITs are equity REITs, which generally derive the bulk of their
income from rental revenue paid by tenants. Prior to 1992, equity
REITs owned their commercial properties directly or through joint
ventures. As Figure 6.1 illustrates, the investing public buys shares
in the REIT, which invests the monies into rentable properties and
in turn pays a dividend back to shareholders from the net income
derived from operating the rental properties. As with any other stock,
the dividend represents an investor’s current return, or yield, on
their REIT shares.
So with a traditional REIT structure (Figure 6.1), shareholders
essentially owned a portion of the REIT’s business enterprise, prorated according to how many shares they owned of the REIT as a
percentage of total shares outstanding. If an investor owned 5 percent of a REIT’s outstanding shares, they essentially owned 5 percent
of that REIT’s assets and operations.
87
88
The Intelligent REIT Investor
Public Investors
$
Shares and Dividends
REIT
Figure 6.1 REIT Structure
UPREITs
Beginning in 1992, the REIT corporate ownership structure underwent a radical change with the introduction of the Operating
Partnership Unit (OP unit) and the Umbrella Partnership REIT
(UPREIT) structure. Taubman Centers, Inc. (NYSE: TCO) is
credited for innovating the UPREIT structure with its initial public
offering (IPO) in 1992.
UPREITs differ from traditional REITs in two ways. First, and as
shown in Figure 6.2, in the UPREIT structure, the REIT does not
own its properties directly. Instead, the REIT owns (usually a great
majority of) units in a limited partnership called an operating partnership (OP), which in turn owns and operates the properties. As
Figure 6.2 illustrates, the UPREIT owns an interest in and is the sole
general partner of its OP. When an UPREIT sells common shares
or issues debt to the investors, it contributes the proceeds raised to
its OP in exchange for additional OP units. The OP technically is
the legal entity that buys and/or develops properties and operates
them. From the money it earns from operating the properties, it
“dividends” money back to the UPREIT, which pays dividends to
the investors. The OP, therefore, is a pass-through mechanism that
is transparent to public shareholders. Second, UPREITs have an
additional currency besides cash and common stock with which its
management team can acquire properties: the OP unit.
Getting Technical
89
Public Investors
$
Shares and Dividends
REIT
$
OP Units
OP Units and Dividends
Operating Partnership
AFFILIATES*
* Affiliates are the private real estate operators who sold
their real estate holdings to the UPREIT in exchange for a
combination of OP units, cash, and/or other consideration.
Figure 6.2 UPREIT Structure
OP Units
As is the case for all U.S. partnerships, the operating partnership of
an UPREIT can issue OP units to the seller of property as a form
of consideration, similar to issuing common shares. OP units are
economically the same as shares of common stock in that the OP
unit holders receive the same distributions per unit as the UPREIT’s
stockholders receive on their common shares. Unlike common stock,
OP units are not publicly traded and the owner cannot vote regarding UPREIT corporate governance matters. In nearly every instance,
OP unit holders can convert each unit on a one-for-one basis into
common stock of the UPREIT or for cash (at the UPREIT’s option).
When unit holders convert to common shares, they become shareholders of the UPREIT. Converting OP units to shares also triggers a
taxable event.
It is the nontraded (that is, illiquid) characteristic of the OP unit
that enables the IRS to view them similarly to like-kind exchanges
when a REIT tenders them as consideration for limited partnership (LP) interests in an acquisition property. Said more simply,
by accepting OP units rather than cash or stock as payment for a
property, the seller of the property may defer the tax liability that
otherwise would have been triggered at the time of the asset sale.
90
The Intelligent REIT Investor
Generally, the IRS views the contribution of limited partnership units
of real property in exchange for partnership interests, including OP
units, as a nontaxable event. As a result, the party that contributed
real estate in exchange for OP units may be able to defer the recognition of capital gains (and the associated taxes) until such time as
they convert their OP units into shares of the UPREIT or cash.
Because OP units enable REITs to acquire properties on the same
basis as regular contributions of properties to partnerships, since
1992 most REITs have opted to adopt the UPREIT structure. Many
REITs that were publicly traded before 1992 have converted to the
UPREIT structure over time.
OP Units and Estate Planning
Private real estate operators typically own their assets in LPs with each
limited partner (investor) having rights to his or her pro rata share of
the partnership’s profits and losses. The Tax Code requires landlords
to depreciate the value of a property (excluding land value) over
the “useful life” of the building. In the cases where private landlords
have owned their properties for a number of years, for income tax
purposes, they likely have a very low or even negative basis in each
asset. Consequently, the sale of their assets at current market values
would trigger a meaningful gain on sale, resulting in a significant tax
liability.
Because OP units are similar to any other partnership contribution in the eyes of the IRS, a seller may defer his current tax liability∗
by accepting a UPREIT’s OP units as part of or the entire sales price,
instead of cash or common stock. Equally important is the fact that,
upon the OP unit holder’s death, the basis in his or her OP units is
stepped up to the then-current market value of the REIT’s common
stock. The seller’s heirs can then convert the OP units into common
shares of the REIT without triggering a capital gain.
∗
Note: Before entering into a transaction, sellers of property should consult
with their tax accountant to determine their ability to defer taxes according to
then-current U.S. Tax Code.
Getting Technical
91
Public Investors
$
Shares and Dividends
$
REIT
OP Units
Special OP
OP Units and Dividends
AFFILIATES*
* Affiliates are the private owners of
real estate sold to the DownREIT.
Figure 6.3 Corporate Structure of a DownREIT
DownREITs
In some instances, older REITs found it too costly to convert to an
UPREIT structure. For example, the legal process of contributing
properties from the REIT to a new OP could trigger potentially massive state-level transfer taxes. To compete with UPREITs in bidding
for privately held assets with tax-efficient purchase proposals, some
REITs began acquiring assets using DownREIT structures. REITs
formed OPs that issued DownREIT OP units to acquire specific
portfolios of assets, usually from one seller or partnership. Figure 6.3
shows a REIT that owns assets directly as well as in a DownREIT
structure.
Issues emerged with this somewhat restrictive structure, however,
such as the REIT’s ability to later sell assets owned in a DownREIT.
Additionally, DownREIT unitholders often had different voting
rights than public shareholders of the REIT, which proved to be an
unsustainable conflict. The DownREIT structure has been improved
to eliminate prior conflicts and today is a useful tool that many
traditional REITs like Kimco Realty (NYSE: KIM) employ when
necessary to acquire assets in a tax-efficient manner.
92
The Intelligent REIT Investor
Publicly Traded, Public Nonlisted, and Private REITs
The focus of the chapters leading up to this point has been to
provide information and data on publicly traded REITs. In the
past two decades, however, private REITs and REITs that are public
but nonlisted on any exchange have proliferated. The biggest difference between publicly traded REITs and their public nonlisted
REIT (PNLR) cousins is liquidity. However, there are many other
differences associated with private and nontraded REITs. Table 6.1
summarizes the major differences between REIT structures.
Volatility versus Liquidity
Investors in PNLRs and private REITs often cite the lack of daily
price changes (or volatility) among the benefits of investing in these
entities. They like the fact that they do not have to worry about the
daily price movements in their investments, as do shareholders in
publicly traded REITs. However, this semblance of stability comes
at the steep price of not having liquidity. Shareholders of publicly
traded REITs own liquid investments that can be sold instantly in
the stock market. It can take weeks or months to redeem an investment in a private REIT or PNLR; in some instances, redemptions
may be forbidden for a specified period of time. If investors need liquidity, they should avoid investing in private REITs and/or PNLRs.
Moreover, a FINRA rule going into effect in April 2016 requires customer statements for PNLR investments to show the shareholder’s
net investment (i.e., subtracting commissions) for the first couple of
years and then the shareholder’s share of net asset value of the PNLR
thereafter. This new rule will make the PNLR shareholder’s investment more transparent and therefore possibly more volatile than in
the past.
Transparency and Corporate Governance
Publicly traded REITs and PNLRs must file quarterly and annual
periodic statements with the SEC. Accordingly, shareholders in
these REITs enjoy a high level of transparency and ultimately
benefit from a greater alignment of shareholder–advisor interests.
In contrast, private REITs do not have to disclose their financial
statements.
93
Brokerage costs the same as for buying
or selling any other publicly traded
stock.
Typically self-advised and
self-managed.
Management
Shares are listed and traded on major
stock exchanges and can be bought
and sold instantly during market hours
through financial advisors and on-line
brokerage houses. Most publicly traded
REITs are listed on the NYSE.
Liquidity
Transaction
REITs that file with the SEC and whose
shares trade on national stock
exchanges.
Overview
Publicly Traded REITs
Typically externally advised and managed,
although many have internal management
before a liquidity event.
Typically, fees of 10–15 percent of the
investment are charged for broker-dealer
commissions and other up-front costs,
although some PNLRs are now spreading
out the fees over several years. On-going
management fees and expenses also are
typical. Back-end fees may be charged.
Shares are not traded on public stock
exchanges. Redemption programs for
shares vary by company and are limited.
Generally, a minimum holding period for
investment exists. Investor exit strategy
generally linked to a required liquidation
after some period of time (often 10 years)
or, instead, the listing of the stock on a
national stock exchange or a merger into a
traded company at such time.
REITs that file with the SEC but whose
shares do not trade on national stock
exchanges.
Public Nonlisted REITs
Table 6.1 Comparison of Public versus Nontraded and Private REIT Structures
(continued )
Typically externally advised and
managed.
Varies by company.
Shares are not traded on public
stock exchanges. Existence of, and
terms of, any redemption programs
varies by company and are
generally limited in nature.
REITs that are not registered with
the SEC and whose shares do not
trade on national stock exchanges.
Private REITs
94
Specific stock exchange rules on
corporate governance.
Required to make regular financial
disclosures to the investment
community, including quarterly and
yearly audited financial results with
accompanying filings to the SEC.
Numerous independent performance
benchmarks available for tracking
public REIT industry. Wide range of
analyst reports available to the public.
Corporate
Governance
Disclosure
Obligation
Performance
Measurement
No independent source of performance
data available.
Required to make regular SEC disclosures,
including quarterly and yearly financial
reports.
Subject to state and NASAA regulations.
Investors reelect directors.
Subject to North American Securities
Administrators Association (NASAA)
regulations. NASAA rules require that
boards consist of a majority of
independent directors. NASAA rules also
require that a majority of each board
committee consist of independent
directors.
Typically $1,000–$2,500
Public Nonlisted REITs
No public or independent source
of performance data available.
Not required.
Not required.
Investors reelect directors.
Not required.
Typically $1,000–$25,000; private
REITs that are designed for
institutional investors require a
much higher minimum.
Private REITs
Source: Reproduced by permission of the National Association of Real Estate Investment Trusts® and is used subject to the Terms and Conditions of Use set forth on the
NAREIT website, including, but not limited to, Section 9 thereof.
Investors reelect directors.
Stock exchange rules require a majority
of directors to be independent of
management. NYSE and NASDAQ
rules call for fully independent audit,
nominating, and compensation
committees.
Independent
Directors
Investor
Control
One share.
Minimum
Investment
Publicly Traded REITs
Table 6.1 (continued)
Getting Technical
95
Costs and Fees
Publicly traded REITs list their costs (both property level and
corporate general and administrative expenses [G&A]) on their
quarterly financial statements, where analysts and investors can
scrutinize how efficiently properties and the company in general are
managed. In contrast, private REITs are not compelled to disclose
any such information. PNLRs historically have been criticized for
charging large upfront fees of 12 percent or more, in part to pay
financial advisors large commissions for marketing their shares.
During the investment period, they also charge fees for buying and
managing properties, and then more fees to various advisors, as well.
The real problem with the fees charged by PNLRs is that historically they were not transparent to investors. When an investor would
buy a share in a PNLR, typically for $10, the value per share listed on
the investor’s statement would be the gross $10, not an amount that
was net of fees and other costs, which typically consumed $1.20 per
share or more. Said another way, the PNLR investor did not realize
they were starting out this investment by using at least 12 percent of
their initial investment to pay brokers, startup costs, and advisory fees
incurred by the PNLR sponsor.
In 2015, the Financial Industry Regulatory Authority (FINRA)
addressed these and other disclosure issues associated with PNLRs
by modifying NASD Rule 2340 (Customer Account Statements).
According to FINRA’s January 2015 “Regulatory Notice,” effective
April 11, 2016, public PNLRs must include per share amounts that
reflect current value, “developed in a manner reasonably designed
to ensure that per share estimated value is reliable” (FINRA Regulatory Notice, January 2015). As a result, investors in PNLRs now have
a better line of sight on how efficiently their investment is being put
to use. However, their overall transparency is less than that offered
by publicly traded REITs, which trade on stock exchanges.
Externally Advised and Externally Managed REITs
The 223 REITs that composed the FTSE NAREIT All REITs Index
at the end of 2015 are publicly traded and, therefore, do not have
the features of private REITs and PNLRs discussed earlier. However,
there is a small population of publicly traded REITs that are externally advised and externally managed, which is similar to how REITs
were structured before the 1986 Tax Act (see section in Chapter 7,
96
The Intelligent REIT Investor
Improvements to the REIT Structure . . .). The externally advised
structure may have conflicts of interest between the REIT advisor
and REIT shareholders; these conflicts can lead to suboptimal capital allocation decisions. Furthermore, research published over the
years by Green Street Advisors, an independent REIT and real estate
research firm, has shown that the average annual total returns of
externally managed REITs often lag that of the industry. First, externally advised REITs do not have any employees; instead, they pay a
fee to an external, third-party advisor, whose employees oversee the
REIT’s daily operations. The advisor also earns a fee on any assets
the REIT acquires. An incentive for the advisor may be to maximize
the amount of properties the REIT owns, not to maximize the performance or profitability of those assets. The conflict between the
advisor and shareholders may not be apparent immediately, but over
time, externally advised and managed REITs tend to underperform
other REITs in the same property sector. To learn if a REIT is an
externally advised or managed REIT, be sure to read the “Company
Description” located in the first few pages of any recent form
10-Q or 10-K that the REIT has filed with the SEC. If the company
states that it is “a self-advised, self-managed real estate investment
trust,” then it does not have the fee-oriented conflicts of interest
just described.
Qualifying as a REIT
Just as The Walt Disney Company (NYSE: DIS) and Apple, Inc.
(NASDAQ: AAPL) must comply with aspects of Internal Revenue
Code (the Code) that govern C-corporations, a REIT must adhere
to certain provisions in order to qualify for and maintain its tax
status. A summary of the principal provisions of the Code for REITs
follows:
Distribution requirements—a REIT must:
• Pay dividends equal to at least 90 percent of its taxable income.
(From 1980 until January 1, 2001, the minimum distribution
requirement was 95 percent of taxable income.)
Qualification requirements—a REIT must:
• Be a corporation formed in one of the 50 United States or the
District of Columbia.
• Be governed by a board of directors or trustees.
• Have shares that are fully transferable.
Getting Technical
97
• By its second taxable year, have a minimum of 100 shareholders.
• Have no more than 50 percent of its shares held by five or
fewer individuals during the last half of each taxable year; this
is known as the “5 or fewer rule,” or the “5/50 test.”
Annual income requirements—annually, a REIT must:
• Derive at least 75 percent of gross income from rents from real
property or, as with mortgage REITs, interest on mortgages on
real property and gains from the sale of real property; this is
known as the 75 percent Income Test.
• Derive at least 95 percent of its gross income from items qualifying under the previously defined 75 percent Income Test,
plus dividends and interest income, and gains from the sale
of stock or other non–real estate investments (the 95 percent
Income Test).
• Derive 5 percent or less of its income from nonqualifying
sources, such as third-party management or leasing fees
provided to properties the REIT does not own. As a result,
REITs often use a structure known as a taxable REIT subsidiary
(TRS) to pursue real estate–related business opportunities
that enhance management’s ability to deliver higher levels
of tenant services. Because the TRS is taxed like a regular
operating company, the REIT is allowed to own up to 100
percent of each TRS’s stock.
Quarterly investment requirements—at the end of each quarter,
a REIT must:
• Invest at least 75 percent of its total assets in real estate assets,
mortgage loans, cash, and government securities.
• Not own more than 10 percent of another company, other
than another REIT, a qualified REIT subsidiary (QRS), or a
taxable REIT subsidiary. In the case of TRSs, no more than
25 percent (20 percent after 2017) of a REIT’s total asset value
may reside in one or more TRS.
• A REIT cannot own stock in any corporation other than a TRS
whose value exceeds 5 percent of the REIT’s total asset value.
Note that a REIT’s board of directors votes on which methodology it will use to measure total asset value. Methodologies include
using gross asset value (also known as undepreciated book value), or
methods prescribed by lenders.
98
The Intelligent REIT Investor
REITs Are Not Limited Partnerships
Even though the IRS can treat OP units similar to other contributions to partnerships, REITs are not partnerships and have no relation
to the real estate limited partnerships (RELPs) of the 1980s. REITs
are C-corporations that are allowed a dividends-paid deduction when
calculating corporate income taxes. Many REITs are publicly traded,
whereas most partnerships are not. Table 6.2 summarizes the many
differences between REITs and partnerships.
Table 6.2 Comparison of REITs and LPs
REITs
Limited Partnerships
Liquidity
Yes. The shares of most REITs
are listed and traded on stock
exchanges
No. When liquidity
exists, generally much
less than REITs
Minimum Investment Amount
None
Typically $2,000–
$5,000
Reinvestment Plans
Yes, including some at
discounts.
No
Ability to Leverage Property
Investments without Incurring
UBIT∗ for Tax-Exempt
Accounts
Yes; this makes REITs suitable
for individual IRAs, 401(k), and
other pension plans.
No
Investor Control
Yes, investors reelect directors
No, controlled by
general partner who
cannot be easily
removed by limited
partners
Independent Directors
Yes, stock exchange rules or
state law typically require
majority to be independent of
management
No
Beneficial Ownership
At least 100 shareholders
required; most REITs have
thousands
Shared between any
number of limited and
general partners
Ability to Grow by Additional
Public Offerings of Stock or
Debt
Yes
Rarely
Ability to Pass Losses on to
Investors
No
Yes
Information to Investors
Form 1099
Form K-1
Subject Investors to State
Taxes
Only in state where investor
resides
Yes, for all states in
which it owns
properties
∗ UBIT
stands for Unrelated Business Income Tax.
Source: Reproduced by permission of the National Association of Real Estate Investment Trusts® and is
used subject to the Terms and Conditions of Use set forth on the NAREIT website, including, but not
limited to, Section 9 thereof.
7
C H A P T E R
REIT Performance
Historical Total Returns
This chapter examines the market forces that influence demand
for REIT shares and, ultimately, REIT performance relative to other
investments. Understanding the various factors that influence REIT
stock price performance will enable investors to make better buy,
hold, or sell decisions among the various REITs that are publicly
traded. With an aggregate equity market capitalization of $939
billion, REITs are an established asset class, but still represent a
relatively small piece of the investment world. For comparison, the
market capitalization of Apple, Inc. (NASDAQ: AAPL) was approximately $530 billion at the end of 2015. As the industry has grown,
particularly in the last 10 years, REITs have gained traction in the
minds and portfolios of an increasing number of investors, though
some still view them as alternative investments. In any given year, the
total returns of REITs have to be all the more compelling to attract
and retain investors. The industry’s smaller relative size magnifies
the effects of investor rotations into or out of REITs. A $100 million
swing of funds into or out of the $939 billion REIT market has a
more material impact on REIT returns than it would on the Dow
Jones Industrial Average, whose 30 constituent companies had a
combined market capitalization of $5.1 trillion at the end of 2015.
As the shaded areas in Table 7.1 show, REITs delivered strong
total returns in 1995–1997, from 2000 to 2006, and again from 2009
to 2012. The disappointing total returns in 1998–1999 illustrate what
happened to REIT returns when fund flows rotated to the higher
growth NASDAQ. During the 2007–2008 global financial crisis,
99
100
The Intelligent REIT Investor
Table 7.1 Total Returns of REITs vs. Major Indices
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1991–2015,
25-year CAGR
REITsa
S&P 500
NASDAQ
DJIA
Russell
2000
−17.3%
35.7%
12.2%
18.5%
0.8%
18.3%
35.8%
18.9%
−18.8%
−6.5%
25.9%
15.5%
5.2%
38.5%
30.4%
8.3%
34.4%
−17.8%
−37.3%
27.4%
27.6%
7.3%
20.1%
3.2%
27.2%
2.3%
−3.1%
30.5%
7.6%
10.1%
1.3%
37.6%
23.0%
33.4%
28.6%
21.0%
−9.1%
−11.9%
−22.1%
28.7%
10.9%
4.9%
15.8%
5.5%
−37.0%
26.5%
15.1%
2.1%
16.0%
32.4%
13.7%
1.4%
−17.8%
56.8%
15.5%
14.8%
−3.2%
39.9%
22.7%
22.2%
40.2%
86.1%
−39.2%
−20.8%
−31.2%
50.8%
9.2%
2.1%
10.4%
10.7%
−40.0%
45.4%
16.9%
−1.8%
15.9%
38.3%
13.4%
5.7%
−4.3%
20.3%
4.2%
17.0%
5.0%
36.9%
28.9%
24.9%
18.1%
27.2%
−4.7%
−5.4%
−15.0%
28.3%
5.3%
1.7%
19.0%
8.9%
−31.9%
22.7%
14.1%
5.5%
7.3%
26.5%
7.5%
−2.2%
−21.5%
46.0%
16.4%
17.0%
−3.2%
26.2%
16.6%
22.2%
−2.2%
21.4%
−3.0%
2.5%
−20.5%
47.3%
18.3%
4.6%
18.4%
−1.6%
−33.8%
27.2%
26.9%
−4.2%
16.4%
38.8%
4.9%
−4.4%
12.1%
9.8%
10.9%
7.9%
10.5%
10-Year 10-Year
Ty Yieldb CMBSc
8.1%
6.7%
6.7%
5.8%
7.8%
5.6%
6.4%
5.7%
4.6%
6.4%
5.1%
5.0%
3.8%
4.3%
4.2%
4.4%
4.7%
4.0%
2.2%
3.8%
3.3%
1.9%
1.8%
3.0%
2.2%
2.3%
NA
NA
NA
NA
NA
NA
115
140
270
210
235
220
181
129
127
180
123
790
5,362
7,315
5,932
725
400
370
355
545
−
−
Shaded areas represent years in which REITs outperformed most major indexes.
Source: NAREIT; S&P Global Market Intelligence; Yahoo! Finance; Bloomberg & Wells Fargo Securities,
LLC
a Annual total returns on the FTSE NAREIT All REITs Index.
b Represents the yield on 10-year U.S. treasury notes at the end of each year.
c
10-year CMBS yield for BBB notes in excess of 10-year U.S. Treasuries (CMBS “spreads”), in basis points.
REITs significantly underperformed other indexes in 2007, strongly
rebounded (like other indexes) in 2009, and then significantly
outperformed other indexes in 2010. Real estate fundamentals,
changes in interest rates, and many other market forces all play a role
in determining REIT performance. Understanding the evolution of
the marketplace for REIT shares is instructive for predicting how
the companies may perform in future circumstances. The following
sections highlight the major milestones in the evolution of the modern REIT market—which in 25 years, has emerged from obscurity
REIT Performance
101
and grown into an industry that, effective September 1, 2016,
will largely compose S&P’s eleventh Global Industry Classification
Standards (GICS) sector: Real Estate.
Factors Influencing Demand for REIT Shares
$45,000
16,000
$40,000
14,000
$35,000
12,000
$30,000
10,000
$25,000
8,000
$20,000
6,000
$15,000
4,000
$10,000
2,000
$5,000
0
19
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
02
20
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
10
20
1
20 1
1
20 2
1
20 3
1
20 4
15
$0
Total Equity Raised
FNER Level
Figure 7.1 Supply of New Equity versus REIT Performance, 1990–2015
Source: NAREIT.
FTSE NAREIT Equity REIT Index
Total Equity Raised ($ millions)
A basic economic principle is that the price of something equals
where supply of that item intersects with demand for it. Although
current stock prices reflect investor expectations about future
company earnings, the fundamental laws of supply and demand
also matter. Because the REIT industry is small relative to other
industries, REIT returns can be negatively affected when too many
REITs issue too many new shares, creating a temporary market
situation of oversupply. As Figure 7.1 shows, the FTSE NAREIT
Equity REITs (FNER) index returns declined after 1997 and 2006.
Although other market forces also played a role in declining REIT
values, both years were preceded by multiple years of heavy new
equity issuance. When other forces caused demand for REIT shares
to soften, the greater supply of REIT equity likely compounded
those declines. What is encouraging is that, after five years of record
equity issuance from 2009 through 2013, the FNER continued to
rise in 2014 and in 2015. Demand for REITs appears to have kept up
with new supply of REIT shares.
The Intelligent REIT Investor
7%
16,000
6%
14,000
FNER Index Level at Year End
5%
12,000
4%
3%
10,000
2%
8,000
1%
6,000
0%
–1%
4,000
–2%
2,000
–3%
–4%
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0
Real Estate Active OEFs as % of Total Active OEFs
102
FNER Level
RE as % All Active OEFs
Figure 7.2 Real estate-dedicated mutual fund flows through, 1993–2015. (Note:
Total Fund Flows based on all actively managed open-end funds (OEFs) for all
U.S. OE Morningstar Categories excluding Money Market & Funds of Funds.
Total Fund Flows for U.S. Real Estate based on actively managed funds in the
Morningstar U.S. OE Real Estate Category. The percent of real estate active OEFs
as a percent of all active OEFs is calculated using annual fund-flow data.)
Source: Morningstar Direct; Cohen & Steers; NAREIT.
Demand for REIT shares plays a larger and multifaceted role
in REIT performance. It can be measured by observing the weekly
flow of funds into (or out of) real estate–dedicated mutual funds.
As Figure 7.2 shows, the strong performance of REITs from 2000
through 2006 corresponded to a sustained flow of funds into real
estate mutual funds. Similarly, REIT returns were negative in 2007
and 2008, years in which funds flowed out of REITs. Fund-flow data
is expensive to access, and, therefore, not available to all investors.
Some REIT research teams at investment banks produce weekly or
monthly fund flow reports but, again, these are not accessible to all
investors. The data shown in Figure 7.2 was provided by Cohen &
Steers, Inc. (NYSE: CNS).
Events That Increased Demand for REIT Shares
What Figure 7.2 also shows is that fund flows into REITs—though
volatile from year to year—have increased from around 25 basis
REIT Performance
103
$7,000
16,000
$6,000
14,000
12,000
$5,000
10,000
$4,000
8,000
$3,000
6,000
$2,000
4,000
$1,000
2,000
0
19
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
02
20
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
1
20 0
1
20 1
12
20
1
20 3
1
20 4
15
$0
Average $ Volume
FNER Level
Figure 7.3 Annual Dollar Trading Volume of the FNER, 1990–2015
Source: NAREIT.
FTSE NAREIT Equity REIT Index
Average Monthly Dollar Trading Volume ($ millions)
points of total fund flows in the early 1990s to over 2 percent in 2015.
From 1993 through 2015, real estate fund flows as a percent of total
fund flows averaged 80 basis points. What Figure 7.2 does not show is
that REITs existed for three-and-a half decades, from 1960 through
1995, before the industry gained meaningful traction with investors.
Until the mid-1990s, the percent of real estate assets as a percent of total mutual fund assets was less than 25 basis points. Prior
to 1990, the supply of REIT shares was too small and the marketplace for REITs was too illiquid to attract meaningful institutional
investor interest. Though REITs offered attractive yields and strong
portfolio diversification benefits discussed in Chapter 2, their thin
average daily trading volumes (see Figure 7.3) relegated them to a
subset of income-seeking individual investors. In 1990, for example,
there were 58 equity REITs with a combined average trading volume of $114 million, implying an average trading dollar volume per
REIT of less than $2 million. By contrast, in 1990, The Walt Disney
Company (NYSE: DIS) average daily dollar trading volume was $58
million (source: NYSE).
In the past 25 years, however, the REIT industry has grown
dramatically. Since 2005 alone, the industry’s average daily dollar
trading volume has increased at a compounded average rate of
12.5 percent, from $1.7 billion in 2005 to $$6.2 billion in 2015
104
The Intelligent REIT Investor
(source: NAREIT). In the 1990s, the REIT industry went through a
period of tremendous growth, both in terms of the number of REITs
that came public and in terms of the market capitalization of the
REIT industry itself. Recall Table 1.1 in Chapter 1, which summarizes the industry’s growth since the early 1970s. In 1990, there were
58 equity REITs, 43 mortgage REITs, and 18 hybrid REITs, for a total
of 119 companies with a combined equity market capitalization of
$8.7 billion. At the end of 2015, there were 182 equity REITs and
41 mortgage REITs, for a total of 223 companies with a combined
equity market capitalization of $939 billion. Several distinct events
supported the REIT industry’s rapid growth since 1990. The following pages address the major milestones that punctuated the REIT
industry’s growth.
S&L Crisis of 1980s Was a Unique Buying Opportunity
During the savings and loan crisis (the S&L crisis), approximately
one-third of the 3,234 savings and loan associations in the United
States failed between 1986 and 1995. Two government organizations
were created to close or otherwise resolve the failed associations:
the Federal Savings and Loan Insurance Corporation (FSLIC) and
the Resolution Trust Corporation (RTC). A major tactic used by
these organizations was to sell the commercial real estate holdings
of S&Ls, often for pennies on the dollar. Real estate companies and
REITs purchased high-quality assets from the RTC for deeply discounted prices, a rare buying opportunity that positioned the REIT
industry for tremendous growth in the 1990s. As the U.S. economy
and commercial real estate markets recovered, REITs began leasing
up vacancy and capturing higher market rents in their RTC properties. As a result, REITs were able to generate average annual total
returns of 17 percent from 1992 through 1996, which significantly
outperformed the returns of other investments (see Table 7.1).
REIT Returns Attract Tsunami of New Capital, 1992–1996
The REIT industry’s strong performance from 1992–1996 attracted
significant amounts of new capital. Taking advantage of the strong
demand for REIT shares, dozens of private companies and portfolios
were able to complete the initial public offering (IPO) process,
swelling the ranks of publicly traded REITs from 138 at the end
of 1991 to 199 companies at the end of 1996. By the same token,
REIT Performance
105
the size of the REIT industry also expanded rapidly. According
to NAREIT, REITs issued $49.7 billion in equity (both through
IPOs and follow-on stock offerings) from 1990 through 1996. The
industry’s equity market capitalization increased from $13.0 billion
at the end of 1991 to $88.8 billion at the end of 1996, representing
a compound annual increase of 37.7 percent.
Professional Money Managers Discover REITs
The advent of professional money managers into the REIT market
was a critical component of the industry’s growth and evolution. In
1985, Cohen & Steers, Inc. (NYSE: CNS) created the first real estate–
“dedicated” mutual fund, and was the sole real estate–dedicated
mutual fund until 1989. As Figure 7.2 demonstrated earlier in this
chapter, investors have increased their allocations to real estate–
dedicated mutual funds dramatically since the late 1980s. Today,
hundreds of institutional money managers invest in a vast array of
REIT-dedicated mutual funds.
Improvements to the REIT Structure Aligned Management
with Shareholders
Part of the reason REITs were small and micro-cap companies prior
to the 1990s was that the REIT structure was flawed. In the late 1980s
and through the 1990s, the structural impediments that hampered
REIT growth were resolved. The Tax Reform Act of 1986 (the “1986
Tax Act”) often is cited for giving the U.S. economy a nasty case
of whiplash when it eliminated certain tax deductions, such as the
ability to recognize passive losses generated by real estate limited
partnership (RELP) investments, which are discussed in Chapter 6.
However, it also dramatically improved the corporate structure and
governance of REITs. Prior to the 1986 Tax Act, REITs were required
to be externally advised and managed by third parties; as a result,
REITs were mutual fund–like, passively managed pools of properties.
Managers were paid a percent of the book value of assets owned
by the REIT, rather than according to profitability. The 1986 Tax
Act empowered REITs with the right to self-manage, self-advise, and
to provide basic “landlord” services to tenants. Accordingly, REIT
management teams became more active managers of their assets,
enabling companies to differentiate themselves from other REITs by
delivering above-average growth.
106
The Intelligent REIT Investor
The REIT Simplification Act of 1994 further streamlined the
REIT structure so that companies could operate as fully integrated
businesses run by professional managers who were compensated for
creating shareholder value, rather than amassing large portfolios.
The REIT Modernization Act of 1999 (the “RMA”) became effective
January 1, 2001, and further increased REITs’ ability to provide
tenant services through the use of taxable REIT subsidiaries (TRSs).
The result of these Acts was to align the economic interests of REIT
management teams with those of the shareholders, making REITs
more appealing investments.
Inclusion in Major Stock Indexes Boosted Market Capitalizations
and Liquidity
The structural improvements to REITs discussed in the preceding
paragraphs, combined with the sector’s attractive total returns, continued to attract an increasing level of capital to the REIT industry in the 1990s. As the average market capitalization of REITs and
trading volumes increased, it became cost efficient for a broader
array of money managers and pension funds to build and maintain
a position in REITs as part of their portfolios. Then in 2001, Standard & Poor’s admitted the first equity REIT to its 500 Index. During
the past 14 years, several REITs have been added and, at the end of
2015, the S&P 500 Index included 24 equity REITs (see Table 1.2 in
Chapter 1 for more detail). The inclusion of an increasing number of
REITs to broader market indexes that money managers use as benchmarks, combined with a strong investor appetite for the safety and
yield offered by REITs, sparked a second sustained inflow of funds
into REIT-dedicated mutual funds, from 2000 to 2006. REIT generally outperformed other indexes again from 2009 to 2015, years of
slow economic growth and lackluster performance from the broader
stock market that followed the Great Recession of 2008–2009.
Changes to FIRPTA Tax Law Should Boost Demand for REITs,
Beginning in 2016
Congress enacted the Foreign Investment in Real Property Act
(FIRPTA) in 1980 in order to tax the gains on sales that non-U.S.
REIT Performance
107
residents realized when selling U.S. real estate, and also to limit
the amount of U.S. property and REITs that foreign investors can
purchase. In December 2015, the Protecting Americans from Tax Hikes
Act of 2015 (the “PATH Act”), affected three significant reforms
to FIRPTA that should increase foreign investor demand for U.S.
REITs. According to NAREIT’s analysis, the PATH Act:
1. Increased from 5 percent to 10 percent the ownership stake
that a foreign investor can take in a publicly traded REIT without triggering FIRPTA liability (i.e., a tax).
2. Removed the tax penalty that FIRPTA imposes on foreign
pension funds that invest in U.S. real estate.
3. Clarified when a listed REIT can be considered “controlled”
by U.S. persons so that sales of its stock are not subject to
FIRPTA.
The PATH Act also eliminated the tax advantages previously associated with spinoff activity, effectively ending the ability of non-REIT
corporations to spin off their real estate holdings into REITs. (REITs’
ability to continue spinning off new REITs, such as Vornado [NYSE:
VNO] recently did with its retail properties into a new REIT, Urban
Edge [NYSE: UE], remains intact and fundamentally unchanged.)
REIT spinoffs by non-REITs became increasingly popular in recent
years as corporations sought to maximize their valuations by monetizing their real estate holdings in what was a tax-efficient manner.
Such spinoffs, however, violated the spirit of the law that supports
REITs, which are not intended to provide a legal means for tax
avoidance. If the trend toward real estate spinoffs by non-REITs had
continued, it very likely would have damaged the REIT industry’s
reputation for good corporate governance, among other things, and
tainted the industry in general. It also would have been a massive
step backward to the days before 1986, when many REITs existed
because they essentially served as financing vehicles for banks that
funded real estate projects. By taking away the tax incentives for
non-REITs to divest their real estate holdings into make-a-REIT
spinoffs, the PATH Act strengthened the overall integrity of the
REIT industry and validated it in the eyes of investors.
108
The Intelligent REIT Investor
Creation of Real Estate GICS Sector in 2016 Should Increase Demand
for REITs
On September 1, 2016, S&P and MSCI will create a new Global
Industry Classification Standard (GICS) sector called Real Estate,
which should be a watershed event for REITs. In the industry’s
initial decades, mortgage REITs outnumbered equity REITs. First
impressions linger and, while the number of equity REITs and their
combined market capitalizations have been greater than those of
mortgage REITs since the 1970s, many money managers viewed REITs
as being a type of financial institution. In 1999, when S&P established
its ten GICS classifications, they formally categorized REITs into the
Financials code, cementing this impression. Real Estate will be the
eleventh such investment sector; its formation should materially
increase investor awareness of REITs, and further broaden the
industry’s appeal to individual and institutional investors. (Note that
mortgage REITs will remain in S&P’s Financials sector.)
REITs versus the Attractiveness of Other Investments
(Lessons from History)
Demand for REIT shares is also affected by the availability of
alternative investments that investors think may offer better returns.
REITs periodically have underperformed other investments during
certain time periods, not so much because of real estate fundamentals, but because of market forces that drove investor dollars into
growth stocks (1998–1999), into U.S. Treasuries (2004–2005), and
into people’s mattresses (2007–2008). Conversely, when returns
on the S&P500 index are uncertain, REITs generally outperform
because investors tend to look for investments that offer safety (or
certainty) and yield. The annual total returns presented in Table 7.1
at the beginning of this chapter illustrate these distinct trading
periods.
Growth Stocks versus REITs, 1998–1999
REIT share prices have been and will continue to be vulnerable
to shifts in investor sentiment toward higher-growth sectors. As
shown in Table 7.1, from 1993 through 1997 REITs delivered
average annual total returns of 18.5 percent, which kept pace with
the similarly strong returns in both the S&P 500 Index and the
NASDAQ (see area A of Figure 7.4). Investor sentiment—and their
REIT Performance
109
100%
Annual Total Returns
80%
60%
40%
Area A
20%
Area B
0%
–20%
–40%
REITs*
02
20
01
20
00
20
99
19
98
97
S&P 500
19
19
96
19
95
19
94
19
93
92
19
19
91
19
19
90
–60%
NASDAQ
Figure 7.4 REIT Performance versus S&P 500 and NASDAQ, 1990–2002 (Note:
Annual total returns on the FTSE NAREIT All REITs Index)
*Annual total returns on the FTSE NAREIT All REITs Index.
Source: NAREIT; S&P Global Market Intelligence.
funds—quickly shifted away from REITs in 1998, however, when the
dot-com and tech frenzy accelerated. During this rotation-to-growth,
which is also called a risk-on trade, investors pulled funds out of
defensive investments, like bonds and REITs, and plowed them into
the tech-heavy NASDAQ. As Area B in Figure 7.4 shows, REIT returns
simply could not compete for investor dollars against the NASDAQ’s
40 percent returns in 1998 and their eye-popping 86 percent total
return in 1999. Even though fundamental demand for commercial
real estate in 1998 and 1999 was strong across all property types,
REITs delivered negative total returns of 18.8 percent and 6.5
percent in those respective years. Note that in the spring of 2000,
when the dot-com investment bubble burst, investors rotated out
of the NASDAQ. This risk-off trade by investors is reflected in the
NASDAQ’s negative 39.2 percent return in 2000 and the REIT
industry’s positive 25.9 percent total return that same year.
Treasury Yield versus REITs, 2004–2006
Although REITs outperformed the S&P500 and the NASDAQ handily from 2004 to 2006, their returns were muted for several months
110
The Intelligent REIT Investor
from yield investors opting out of REITs in favor of U.S. government
bonds. Because REITs offer attractive dividend income, investors will
(and should) always compare REIT yields to those of fixed-income
investments. Historically, REIT yields have been compared against
the yield on 10-year U.S. Treasury notes. From March 2004 through
June 2006, notable increases in the yield on 10-year U.S. Treasuries
precipitated equally distinct declines in REIT valuations. The drop in
valuations was short-term and sporadic. Typically, a decline in REIT
valuations in reaction to rising interest rates or Treasury yields turns
out to be a compelling buying opportunity for REIT investors, especially those that are patient. (Please refer to REIT Performance in a
Rising Interest Rate Environment later in this chapter for a more detailed
discussion of this topic.)
Safety and Yield, and the Big League of Benchmarks, 2000–2006
The bursting of the technology bubble in spring 2000; the accounting scandals at high-profile companies like Enron (formerly NYSE:
ENE) in 2001 and 2002; the tragedy associated with events in the
United States on September 11, 2001 (9/11). Each event shook
investor confidence and negatively affected the broader stock
market. Each event also helped fuel a seven-year rally in REITs, as
investors increasingly looked to the group as a source of stable,
more visible income. As Table 7.1 illustrated earlier in this chapter,
REITs outperformed the broader markets from 2000 through
2006. As previously discussed, investors already were rotating from
the NASDAQ into investments, like REITs, that offered safety
and yield. From 2000 through 2006, REITs issued $200 billion of
equity, preferred stock, and debt capital, $65.3 billion of which
was common equity. The industry’s market capitalization increased
approximately 250 percent, from $124 billion at the beginning
of 2000 to $438 billion at the end of 2006 (see Figure 7.5). The
strong demand for REIT shares was driven both by the fundamental
investor appetite for safer, higher-yielding investments, such as
REITs, and also by a watershed event for REITs: the addition of the
first equity REIT, Equity Office Properties (former NYSE: EOP),
to the S&P 500 Index. REITs had made it to the big league of
benchmarks, and the added visibility from inclusion in the S&P 500
Index supercharged market dynamics that already favored REIT
investment.
REIT Performance
$1,200
Total Equity Raised by REIT
$40,000
$1,000
$35,000
$30,000
$800
$25,000
$600
$20,000
$15,000
$400
$10,000
$200
$5,000
$0
REIT Industry Equity Market Cap
$45,000
111
19
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
02
20
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
1
20 0
1
20 1
1
20 2
1
20 3
1
20 4
15
$0
Total Equity Raised
REIT EMC*
Figure 7.5 REIT Common Stock Issuance and Growth in Industry Market Cap,
1990–2015
Source: NAREIT.
REITs During the Financial Crisis of 2007–2008
One of the most reliable ways investors can gauge market risk
is to observe the weekly rate of change in 10-year commercial
mortgage-backed security (CMBS) spreads. (If investors do not have
access to a Bloomberg terminal, they can request this information
from their financial advisors.) When the CMBS spreads increase
(or widen) over the prior week’s level, then the market is factoring
in more risk, such as the risk of recession or other events that would
affect the broader markets.
Changes in the spreads on 10-year CMBS have proven to be a
highly accurate predictor of short-term returns in the REIT market.
For example, the 10-year CMBS spreads, which are expressed as
a number of basis points above the yield on 10-year U.S. Treasury
notes, dramatically widened by 540 percent throughout 2007, from
123 basis points at the beginning of the year, to 790 basis points.
By the end of 2008, 10-year CMBS spreads had exploded to 5,362
basis points over Treasuries. As Figure 7.6 and Table 7.1 show,
REIT share prices declined commensurately as the CMBS spreads
increased. Even though the global financial crisis of 2007–2008
began in the overleveraged housing market, rather than in the commercial property markets, REITs delivered total returns of negative
17.8 percent in 2007 and negative 37.3 percent in 2008.
112
The Intelligent REIT Investor
Investment Tip
If a credit crisis is possible, stocks associated with real estate, such as
REITs, are likely to underperform the broader market due to investor
fears—real and imagined—about the sustainability of corporate dividends and the risk of defaulting on loans scheduled to mature in
the near term.
Investors feared that all companies, including REITs, would
either refinance maturing debt at abnormally high interest rates or,
worse, that they might not be able to refinance debt “at any price,”
in which case management may choose to dilute existing shareholders with an “emergency” equity issuance to raise capital. Any
of these pricey refinancing alternatives would dampen future REIT
profitability. As discussed in Chapter 3, between 2007 and 2009 only
one publicly traded equity REIT entered bankruptcy to restructure
its debt, but nearly a third cut or suspended their dividends to preserve capital during these highly uncertain market conditions. Once
REITs began issuing new equity—at prices that were highly dilutive
to existing shareholders and to future earnings—it became clear
that the industry and its constituents would endure. REIT valuations
recovered fairly rapidly in 2009, as a result.
50%
8,000
40%
7,000
30%
6,000
20%
10%
5,000
0%
4,000
–10%
3,000
–20%
2,000
–30%
CMBS Sprcads
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
–50%
20
01
1,000
20
00
–40%
REITs
Figure 7.6 REITs Returns versus 10-Year CMBS Spreads, 2000–2011. (Note:
REIT performance as measured by the annual total returns for the FTSE NAREIT
All REITs Index. CMBS Spreads are for 10-year, BBB notes at year-end, in basis
points.)
Source: NAREIT; Bloomberg & Wells Fargo Securities, LLC.
REIT Performance
113
Company Attributes That Affect Performance
The REIT industry comprises an increasingly wide array of commercial real estate. Each REIT in every property sector is governed by
three broad forces that affect their performance, both on an absolute basis and relative to other REITs: real estate fundamentals, lease
structure and duration, and cost of capital. Real estate fundamentals,
and especially the degree to which demand for a property type is
consistent throughout different phases of the economic cycle, affect
a REIT’s profitability over the long term. A property sector like
health care, for example, benefits from steady (or inelastic) demand
for its product; regardless of economic growth, people need access to
health-care services. Consistent demand translates into steady occupancy levels, which should translate into a consistently profitable
REIT. Different lease structures and durations discussed in Chapter
4 result in different operating margins, which also affect operating
profits. Lastly, how a management team finances its operations is an
increasingly important factor in determining long-term total returns.
When the economy slows or goes into recession, the profitability of
any real estate will decline. But stock performance across property
sectors and among companies can differ widely due to these three
basic extrinsic and intrinsic factors, which the next several pages
explain in more detail.
Real Estate Fundamentals and REIT Performance
Real estate is tangible, and investors often take comfort in the
visible signs that indicate how the local economy is fairing. A full
parking lot at an office building or at a retail center signals
times are good; “For Rent” or “Space Available” signs can signal the beginning of an economic slowdown. Often, however,
REIT share price performance does not reflect what investors
observe. Retailers often go bankrupt during a recession, but retail
REITs rarely do. In fact, REIT share prices frequently appear to
perform without a direct relationship to what is happening in
the underlying property markets. Such counterintuitive behavior
typically occurs when the economy is in transition, either going
into or coming out of recession. The explanation for this occasional disconnect between REITs and real estate fundamentals
lies in understanding the tension that exists between the fact that
real estate is a lagging economic indicator, whereas REIT share
prices (like any publicly traded equity) are functions of future
114
The Intelligent REIT Investor
earnings expectations. The following pages address the periodic
disconnect between real estate fundamentals and REIT share
performance.
The Property Cycle and the Economic Cycle
Market forces discussed earlier in this chapter typically affect REIT
performance in the short or medium term. Supply of and demand
for commercial space, which are the two primary real estate fundamentals, affect REITs’ longer-term operating performance and,
by extension, returns for shareholders. When a property market
is inundated with too much new construction (supply), vacancy
rates increase and landlords decrease rental rates in an attempt to
keep existing tenants in their spaces. Whether landlords experience
increases in vacancy or declines in rental rates (or both), their profit
margins decline.
Although assessing the supply of competitive buildings by each
property type is an important component of selecting REITs that may
outperform (or avoiding those that may underperform), it is difficult
for most individuals to gauge new construction in multiple markets
with much accuracy. Apart from subscribing to a data provider that
tracks supply, most investors rely on anecdotal information gleaned
from newspapers and conversations with local real estate brokers.
More dedicated individuals may even count cranes they see in cities
they visit to assess whether a market may be getting overbuilt. It is far
easier to estimate and anticipate demand for property in each market
by interpreting current economic data. By understanding how the
real property cycle interacts with the economic cycle, it is possible to
make smart and timely REIT investments.
The property cycle encompasses how occupancies and rents in
a market fluctuate, and whether new construction “makes sense.”
Overbuilding of certain property types has precipitated economic
declines in the past when demand was not sufficient to fill new
buildings, leading to widespread defaults on debt, such as was seen
during the S&L crisis. The “housing bubble” and related defaults
are often cited for triggering the Great Recession of 2008–2009
in the United States. Setting aside periods of severe market dislocation, the real property cycle generally responds in predictable
ways to what is occurring in the underlying economy. Figure 7.7
illustrates how the property cycle responds to the economic cycle.
Each phase is then discussed.
REIT Performance
115
3. Supply & Demand Equilibrium
Occupancy
2. Expansion
4. Oversupply or
Lack of Demand
Frictional Vacancy
1. Recovery
5. Recession
Figure 7.7 The Property Cycle
1. Recovery—After the economy emerges from recession, the
recovery period for real estate is characterized by a lack
of new construction because rental rates are not improved
enough, generally, to merit the cost of new development.
(Land prices, labor, and construction materials, such as steel,
tend to appreciate or inflate over time, making new development more costly from one cycle to the next.) Because
demand for space is recovering without the addition of new
supply, occupancies rise. REITs with cash on hand (or low
levels of debt) are able to buy assets at attractive discounts to
replacement cost, enabling them to deliver outsized returns
on their investment.
2. Expansion—During an economic expansion, occupancy
continues to increase but at a decreasing rate from prior
periods. Landlords are able to push for higher rents on new
leasing to the point that assets can no longer be purchased
at discounts to replacement costs. As rental rates rise, new
construction begins to become profitable again.
3. Supply-and-Demand Equilibrium—This is a state of commercial property nirvana that is rarely achieved, in large part
because private developers tend to overbuild their markets
(at least slightly) during each cycle.
4. Oversupply or Lack of Demand—As the economy begins to
slow, property markets continue to add new supply, albeit at
116
The Intelligent REIT Investor
a reduced pace. This is because new construction started during the late phase of the economic expansion frequently is
delivered into a softening economy. A “construction cycle”
is the time it takes to erect a building, usually expressed in
months or years. The longer the construction cycle is for a
property type, the greater the risk that the property sector
will experience periods of oversupply. High-rise office buildings, for example, can take two or more years to construct, and
that is after the developer receives all the zoning and necessary approvals, and then breaks ground on the site. During
construction time, the economy may change for the worse,
resulting in some office buildings being delivered to a market that no longer has sufficient demand to fill the new space.
During periods of oversupply or declining demand, vacancies
increase. However, rents may still increase for a period of time
because not all tenants’ business will feel the effects of a slowing economy at the same time.
5. Recession—An extension of the oversupply phase, property
markets can slip into recession if too much supply is delivered
into an economy that is in recession. The lack of demand for
space, compounded by the new square feet coming onto the
market initially, causes some tenants to sublease their unused
space. Investors should watch for signs of increasing levels of
subleased space, also called “shadow supply,” to signal a market’s decline. Then direct vacancies begin to rise as tenants
choose not to renew some or all of their previously leased
space. In such an environment, landlords will offer concessions and lower rental rates to maintain as much occupancy
as possible. The magnitude of such concessions varies by property type and by market.
Performance by Property Type
As discussed in Chapter 5, in addition to the “basic foods groups”
of office, industrial, retail, and apartment buildings, REITs own and
operate nearly every type of property imaginable. The drivers of
demand for each property type also differ. Table 7.2 summarizes
how the different property types of REITs have performed over time.
Before discussing how different economic news is likely to affect the
performance of different REITs, there are two broad-based factors
that influence tenant demand for all types of space.
117
NA
NA
−
−
NA
NA
−
−
NA
NA
−
−
34.0%
49.2%
20.4%
42.8%
46.1%
−
NA
NA
−
−
21.7%
30.1%
15.8%
3.4%
27.3%
−
NA
NA
−
−
−22.1%
−52.8%
−17.4%
−7.2%
−24.3%
−
−8.1%
−8.8%
−0.9%
NA
NA
−
−
30.4%
29.9%
31.9%
24.0%
21.1%
17.7%
24.6%
21.8%
46.8%
43.1%
52.2%
35.9%
40.2%
36.3%
45.0%
32.9%
−
NA
NA
−
−
−
−
NA
NA
−
−
NA
NA
−
−
3.8% 37.1% 31.6%
NA
NA
−
−
2008
2009 2010
6.0%
5.6%
7.4%
5.6%
−
−
−
−
−
−
−
−
15.4% 6.9% −5.4% 40.0%
15.1% 6.9% −6.2% 39.6%
20.4% 7.1% 10.5% 46.2%
27.6%
30.0%
32.6%
9.7%
24.3%
25.7%
21.0%
23.1%
2012 2013 2014
14.1%
12.2%
17.2%
14.1%
13.5%
13.1%
12.2%
11.7%
1.8%
17.1% 14.1%
16.5% 14.2%
25.7% 12.8%
4.6%
4.7%
4.2%
5.9%
−
0.3%
2.6%
−
2015 Average
NA
NA
−
−
NA
NA
−
−
NA
NA
−
−
NA
NA
−
−
NA
NA
−
−
Source: NAREIT.
Shaded areas highlight top-performing property sector each year.
a Returns are based on monthly returns for 1994-1998, and daily returns for 1999 and thereafter.
b
NAREIT discontinued tracking Triple-Net/Specialty REITs in 2010, and reclassified the constituent companies into other categories.
c NAREIT discontinued its FTSE NAREIT Hybrid and REIT Index in 2010.
11.6% 50.7% 23.3% 56.2% 23.9% −10.8% 40.9% −34.8% −75.5% 41.3% c
25.9% 15.5% 5.2% 38.5% 30.4%
8.3% 34.4% −17.8% −37.3% 27.5% 27.6%
2.5% 30.1%
−
−
7.3% 20.1%
−
−
3.2% 27.2%
−2.4% 19.9% −2.0% 17.9%
8.3% 18.1%
7.7% 37.1% 7.9% 8.6%
NA 29.9% 20.2% 20.2%
−
−
−
−
−
−
−
−
−
−
2.3% 12.1%
−8.9% 10.3%
3.2% 12.6%
−7.0% 10.8%
3.7% 18.5%
1.5%
1.7%
38.0% −22.3% −28.2% 17.0% 23.8%
2.8% 12.2% 4.3% 27.2% −0.5% 10.5%
28.2% −22.4% −59.7% 67.2% 42.8% −14.3% 12.5% 27.2% 32.5% −24.4% 10.5%
44.5%
2.1% −12.0% 24.6% 19.2% 13.6% 20.4% −7.1% 33.3% −7.3% 14.2%
40.9% −24.8%
5.0% 8.4% 29.3% 35.2% 19.9% 9.5% 31.4% 40.7% 19.2%
23.6% 14.6% −25.7% 31.5% b
−
−
−
−
−
8.5%
−
12.2% 35.1% −15.7% −37.7% 28.0% 28.0%
NA
NA
−
−
9.9%
9.8%
1.8%
26.6%
10.4%
−
2011
29.0% −15.8% −48.4% 27.2% 33.4% 12.2% 26.7% 1.9%
34.9% −17.7% −38.8% −1.7% 30.8% −0.7% 25.0% 5.0%
23.8% −15.9% −60.6% 63.0% 34.6% 22.0% 28.2% −1.0%
30.7% −0.4% −15.1% 25.9% 37.4%
0.4% 22.5% 7.3%
13.7% 38.9% −25.2% −24.9% 30.8% 46.0%
14.7% 39.9% −25.4% −25.1% 30.4% 47.0%
−2.6% 15.3% −19.3% −20.2% 40.9% 27.0%
11.8%
9.3%
16.5%
−0.5%
2007
39.4% −14.9% −50.3% 29.2% 17.0% −1.5% 19.1%
45.2% −19.0% −41.1% 35.5% 18.4% −0.8% 3.3%
28.9%
0.4% −67.5% 12.2% 18.9% −5.2% 31.3%
28.3% −33.1% −34.0% 34.9% 8.8%
2.7% 20.8%
2006
16.0% 77.3% 31.1% 57.4% 18.4% −23.2% 19.3% −42.3% −31.3% 24.6% 22.6%
26.4% 13.9%
NA
NA
−
−
−
12.5% 4.2% 40.3% 32.4%
−8.6% −1.5% 31.7% 32.7%
51.9% 4.8% 53.6% 21.0%
43.2% 0.6% 38.1% 29.7%
7.6% −5.4% 38.6% 26.9%
−
34.3% 9.0% −6.0% 25.9% 32.7%
35.5% 8.7% −6.2% 25.5% 34.7%
20.9% 13.7% −4.1% 30.0% 6.4%
18.0%
15.1%
23.5%
8.9%
12.9%
13.1%
15.4%
7.4%
2005
Annual Total Returns (a)
2001 2002 2003 2004
33.4% 7.1% 0.9% 33.3% 25.2%
35.5% 6.7% −6.8% 34.0% 23.3%
28.6% 7.4% 17.3% 33.1% 34.1%
32.0% 8.2% 8.6% 31.3% 19.6%
2000
−14.4% 24.1%
−16.1% 45.8%
−24.8% 25.8%
−8.0% 14.7%
−25.7% −31.6%
−
9.5%
10.7%
−2.8%
−4.9% −11.8%
−7.0% −10.7%
−2.6% −14.6%
−6.2% −4.9%
3.2% 15.3% 35.3% 20.3% −17.5% −4.6%
21.1%
30.8%
24.9%
34.4%
27.6%
−
−6.0%
−8.9%
4.1%
8.9%
−5.2%
−
2.3% 12.0% 29.5% 16.3%
2.2% 12.3% 28.9% 16.0%
3.3% 10.7% 34.9% 18.6%
16.9%
21.4%
13.7%
17.7%
3.4%
4.3%
3.9%
−0.7%
1999
FN Mortgage
−24.3% 63.4% 50.9% 3.8% −29.2% −33.2%
REIT Index
Hybrid REIT Index
4.0% 23.0% 29.4% 10.8% −34.0% −35.9%
FN ALL REITs
0.8% 18.3% 35.8% 18.9% −18.8% −6.5%
Index
FN Equity REIT
Index
Diversified
Hotels
Health Care
Self Storage
Triple−Net &
Specialty
Timber
Infrastructure
Data Centers
Specialty
Residential
Multifamily
Manufactured
Homes
Single Family
Homes
34.6%
33.5%
45.3%
30.9%
3.0%
1.3%
8.8%
−5.5%
Retail
Shopping Centers
Regional Malls
Free Standing
5.1%
7.4%
3.0%
31.6%
16.6% 25.8% 44.4% 27.5% −14.4%
2.9% 38.8% 51.8% 29.0% −17.4%
18.7% 16.2% 37.2% 19.0% −11.7%
NA
NA 40.8% 27.9% −8.9%
1998
Industrial/Office
Office
Industrial
Office & Other
1995 1996 1997
1994
Property Sector
Table 7.2 Historical Total Returns by Property Sector
118
The Intelligent REIT Investor
Location and Efficiency Matter
Demand for a property is measured by how fully occupied a building
is, especially when compared to similar, “competing” buildings in a
market. If office building A is 90 percent occupied and office building B is only 80 percent occupied, it is likely that office building A is
both more modern and functionally efficient for office tenants than
building B, and/or building A may be in a better location than B.
The average rents in place at a building also help investors gauge
how desirable a property is, as better locations almost always garner
higher rental rates. Regardless of whether the underlying economy
is expanding or contracting, office building A has the competitive
advantages of functionality and location, and should benefit from
higher tenant demand throughout the economic cycle than building B.
“Defensive” Property Types Enjoy Steady Demand
Some types of property are considered defensive because they
generate consistent earnings and/or maintain fairly high occupancy
rates regardless of the economic or business cycle. For example,
triple-net REITs (see Chapters 4 and 5) employ long-term leases that
provide predictable earnings streams in any economic condition.
The only disruptions to the landlord’s cash flows are when a tenant
goes bankrupt or does not renew a lease when it expires. Neighborhood or community shopping centers also tend to be defensive
assets, owing to the fact that they usually are anchored by a grocery
or drugstore, both of which enjoy fairly inelastic demand for their
goods. In contrast, hotels have no leases with their customers, and
experience higher vacancies when consumers cut back business
and leisure travel when the economy slows. Investors, therefore,
may enhance their returns by accurately assessing the direction of
the economy and aligning that view with REITs in property sectors
that are likely to benefit from current and expected economic
conditions.
If the economy has a high probability of slipping into recession,
property sector returns from the recent global financial crisis are
instructive. As Figure 7.8 demonstrates, the more defensive property sectors (net-lease REITs, health-care, self-storage, and industrial
REITs) significantly outperformed less defensive asset types (malls,
office apartments, and hotels).
REIT Performance
Health Care
–5%
–6%
Triple-Net and Specialty
Freestanding Retail
–8%
Self-Storage
–10%
Residential
–25%
–25%
Diversified
Equity REITs
–27%
Shopping Centers
–28%
Office and Industrial
–33%
–38%
Malls
Hotels
Mortgage and Hybrid REITs
–60%
119
–41%
–46%
–50%
–40%
–30%
–20%
–10%
0%
Figure 7.8 Total Returns of Different Property Types During the 2007–2008
Global Financial Crisis
Source: NAREIT.
Recall that Table 7.2 provides historical total return data by
property type, and highlights which sectors delivered the higher
total return each year. Table 7.3 summarizes how different economic
statistics that are in the news typically affect demand for different
types of commercial property. Investors can use the information
contained in both tables to observe how different property types
performed in past economic recessions and recoveries. To facilitate
such an analysis, there is a more detailed discussion of how different
types of REITs perform during certain economic conditions.
To illustrate the information in Table 7.3, assume the economy is
likely to go into recession within the next year, that unemployment
will rise, and corporate and consumer spending will decline. Assume
for now that interest rates remain stable. (The last section of this
chapter addresses REIT Performance in a Rising Interest Rate Environment.) The following information is a generalization about how REIT
shares in different property sectors are likely to trade in advance of
an economic downturn:
• Hotel REITs are likely to underperform because investors will
expect reduced spending to result in less travel, or demand
for hotel rooms. Because hotel REITs generally have no leases,
their stock prices immediately reflect lower expected future
profits.
120
The Intelligent REIT Investor
Table 7.3 Economic Drivers of Demand for Real Estate
Impact on Demand for Space
Economic Indicator
Direct
Indirect
None
Rising Unemployment
Office (–)
Apartments (–)(+)a
Industrial (–)
Retail (–)
Hotels (–)
Self-Storage (+)
Health Care
Decreased Corporate
Spending
Hotels (–)
Office (–)
Industrial (+)b
Apartments (–)
Health Care
Retail
Self-Storage
Decreased Consumer
Spending
Industrial (–)
Hotels (–)
Retail (–)
Apartments (–)
Office (–)
Self-Storage (–)
Health Care
Rising Interest Rates
Mortgage REITs (–)c
Apartments (+)(–)d,
Industrial (–)e
Hotels (–)e
Health Care (–)e
Office (–)e
Retail (–)e
Self-Storage (–)e
e
a
If unemployment is high for an extended period of time, demand for apartments may increase as some
homeowners will need to sell their homes (or be foreclosed upon) and become renters.
b While a prolonged recession likely would result in decreased demand for industrial space to accommodate a smaller volume of goods flowing to market, in the short term, inventories typically accumulate,
causing a modest, short-lived increase in demand for industrial space.
c Rising interest rates would lower the positive spreads most mortgage REITs could lock in on investments.
The “spread” is the difference between where a REIT can invest capital versus the cost of that capital.
d A rise in long-term interest rates would make home buying less affordable, which would generate incremental demand for apartments.
e
An increase in interest rates would negatively affect any REIT that needed to refinance debt, provided
that the interest rate on new debt is higher than the rate on the debt that is maturing. However, any such
dilution to future cash flow would be limited to specific debt maturities that need to be refinanced, rather
than the REIT’s entire debt profile.
• Apartment REITs are likely to outperform because demand
for rental properties may remain steady or actually increase,
making them a defensive asset class. There are three sources
of demand for apartments in a market: (1) newly hired workers who typically rent for a period of time before buying a
house, (2) homeowners who need to re-enter the rental market again because they cannot afford the costs of home ownership and maintenance, and (3) “empty-nesters” who decide to
sell their houses and move into rental units (usually in more
REIT Performance
•
•
•
•
121
densely populated cities or town centers) in order to avoid the
hassles of homeownership. As long as a market has not become
overbuilt with too many new residential units, apartment REIT
landlords are likely to fare better than landlords of some other
property types.
Shopping center REITs are likely to outperform other sectors
during a slow or soft economic environment because they
are also defensive asset classes. Many shopping centers are
anchored by grocery stores and/or pharmacies. The essential
nature of the goods sold at these stores generates steady traffic
at such centers, regardless of the broader economic trends.
Self-storage REITs are another defensive property type.
Demand for space tends to be steady as long as people are
moving from one location or household to another, whether
it is part of taking a new job or downsizing into a smaller
household after children have graduated college, for instance.
Stable households also use self-storage to store seasonal and
other items that may not fit into their attics and other home
storage areas.
Industrial REITs are a defensive asset class because goods
need to be stored and distributed to retailer and consumers
throughout the economic cycle. Demand for industrial space
is driven by population growth and the associated growth in
consumer spending, including the increasing use of shopping
online with the Internet. At the onset of a recession, demand
for industrial space may actually increase because manufacturers are not selling their goods as quickly, and have not yet
adjusted to the lower demand for product. Industrial space
demand is not completely inelastic, however, and vacancies do
rise modestly during a recession, causing the industrial REITs
to sometimes underperform other sectors.
Office REITs actually perform well for the first year or two
of an economic slowdown, which is counterintuitive because
demand for office space is correlated to job growth. A decrease
in nonfarm payrolls (or office-using jobs) translates into lower
demand for office space, but the tenants cannot give back
unneeded space until their lease expires. As a result, the
inevitable increase in office vacancy during a recession takes
a few years to materialize. Once landlords (REITs) begin
122
The Intelligent REIT Investor
experiencing “roll-down” in their rents (meaning the new
market rents they negotiate on expiring space is below the
rent that was being paid), their stock prices tend to underperform other sectors for two or three years until they have
worked through their rent roll-down.
• Health-care REITs are a very defensive asset class because people always use health and medical services, regardless of what
the economy is doing. As the population grows, there is more
demand for health-care services and, by extension, more need
for new, efficient, well-located health-care real estate.
How Lease Length and Structure Affect REIT Returns
Most investors have heard or read that “real estate is a lagging indicator.” Whatever the economy is doing, it takes a number of months
or years for an office building or shopping mall to reflect economic
changes in the form of higher/lower rents and occupancy levels. The
longer the leases the landlord has negotiated with tenants, the longer
it will take a property’s cash flows to reflect any change—good or
bad—in the local economy. In other words, real estate lags because
it has leases.
Existing leases generate revenues even when there is no new leasing or demand for property in the market. As a result, landlords
(REITs) can deliver relatively solid 4 to 8 percent earnings growth
even as the economy slips into recession. Similarly, when the economy begins expanding again, existing leases cannot be marked to
higher current market rents until they expire. So it takes varying
amounts of time for changes in the economy to trickle through different property types. Knowing the average lease length and type of
lease used by a REIT, therefore, is helpful in determining when to
buy or sell its stock.
Real estate performance lags economic conditions, depending on
the leases in place. The longer the lease length, the longer the property’s cash flow takes to reflect what’s happening in the economy.
Knowing the average lease length and the type of lease structure
a REIT employs helps predict how a REIT’s shares may trade during
times of economic expansion and contraction.
REIT Performance
123
For example, the longer average lease term associated with office
space is the main reason why office REITs often outperform in the
early phases of a recession. Their multiyear average lease term delays
the effects of current employment trends from manifesting in their
rents and occupancies for several years. Assuming the landlord prudently staggers lease expirations throughout the portfolio, five-year
leases would translate into approximately one-fifth, or 20 percent
of leases expiring (or rolling) each year. Office landlords mark the
expiring leases to current market rents, and they try to lease any
vacancy their portfolio contains. During the early phase of an economic decline, office REIT returns are buffered by the existence of
in-place leases, and the sector tends to outperform the average REIT.
Conversely, office REITs tend to underperform the REIT industry
during the early stages of an economic recovery, as rents that were
negotiated in better economic times expire and roll to potentially
lower market rents.
Lease Length and Volatility (Risk)
As a general rule, REITs that own commercial properties with shorter
initial lease lengths tend to trade with more volatility—meaning
they experience greater percentage change in their daily stock
price—than REITs that employ longer leases. Figure 7.9 graphically
presents where REITs focused on different types of property rank in
terms of trading volatility, which is a proxy for risk. The nature of the
demand for each property type, which was discussed earlier in this
chapter, also plays a part in a stock’s trading volatility. For example,
demand for hotels is more cyclical, or dependent on broader
economic trends, than demand for warehouse space. People do not
have to travel, but goods have to be stored and/or distributed to
grocery stores and other vendors regardless of the economic state.
In Figure 7.9, property types in quadrant 1 generally are appropriate for investors who have a higher risk tolerance. REITs in quadrant 4 are focused on property types that are less volatile, making
these types of REITs more appropriate for risk-averse investors.
Shares of REITs that own properties with shorter-term leases tend
to trade with more volatility than those with longer lease lengths.
124
10
The Intelligent REIT Investor
Hotels
Apartments
Office
1
2
Malls
Trading Volatility
Self-Storage
Health-Care
Shopping Centers
Industrial
Triple-Nets
3
0
4
Lease Length (years)
15
Figure 7.9 Riskiness of Different Property Types. (Note: Quadrant #1 = highest
volatility/risk; quadrant #4 = lowest volatility/risk.)
Long-Term Leases = Low Volatility
As discussed in Chapters 4 and 5, REITs that use triple-net leases
typically rent their properties to tenants for 10 years or longer.
During times of economic expansion, the triple-net landlord is not
able to mark existing leases to market and misses out on potential
windfalls from rent increases. Similar to how municipal bonds and
other fixed-income investments generally underperform equities
during an economic expansion, REITs that use long-term triple-net
leases also tend to underperform other REIT sectors when investors
seek growth over safety. However, during tough economic times,
long-term leases produce steady, highly visible lease revenue. When
investors are uncertain about the economy, they tend to invest
in defensive assets—ones that will produce steady returns and/or
cash dividends, regardless of the economic environment. During
uncertain or recessionary economic times, triple-net REITs tend to
outperform other property types. (Note that NAREIT does not have
a triple-net REIT classification; as Chapter 5 discusses, REITs that
use triple-net leases tend to be those companies in the freestanding
retail, health-care, and diversified property types.)
REIT Performance
125
Short-Term Leases = High Volatility
Hotel REIT cash flows are more like those of an operating company
than of other REITs. Unlike most traditional REITs that receive
contractual rents from leases with tenants, hotel REITs do not have
“guest leases.” Guests stay at hotels for business or leisure, and
usually only for a night or two. Though advanced bookings by large
groups for conventions or weddings can provide a margin of visibility
for room demand, hotel operators essentially need to lease up their
properties from scratch each day. During flush economic times,
hotel landlords can increase prices and achieve strong, double-digit
earnings growth. Therefore, when it looks like the economy is
coming out of recession, hotel REITs tend to outperform other
REIT-asset classes, because investors will pay a higher premium
today to participate in the expected strong rent growth they will
enjoy. In a down economy, however, hotel operators often have to
cut their daily rates (and a portion of their employees) to maintain
profitability. Unsurprisingly, hotel REITs tend to underperform
when the economy is slowing down and/or at risk of slipping into
recession.
Hotel REITs’ Higher Volatility Is an Investment Opportunity
The cyclical nature of demand for lodging is a major reason why
hotel REITs trade with greater levels of volatility than the average REIT. This volatility lends itself to greater risks for would-be
investors but also to greater potential returns. As Table 7.4 illustrates,
hotel REIT annual total returns tend to diverge from that of the
broader REIT industry. For example, in 2008 when the U.S. economy
was sliding into recession, the average REIT declined 41 percent and
hotel REITs fell 63 percent. Conversely, in 2009, when the economy
stabilized and started to recover, the average REIT rebounded 27
percent, which was impressive but still paled in comparison to the
63 percent price appreciation enjoyed by hotel REITs.
Because they trade with greater volatility, hotel REITs are one of
the few property types investors may want to buy opportunistically
when they are at depressed levels, and sell when the stocks—and
the underlying economy—are recovered. There is an old expression
that the only people who can time the stock market are fools and
liars. However, using a contrarian trading strategy with hotel REITs,
over time, does seem to be possible and should help investors avoid
“buying high and selling low.”
126
b Source:
SNL Financial; Price-only.
FTSE NAREIT Equity REIT Index; Price-only.
c
Source: Bureau of Economic Analysis.
Recessions years are shaded.
a Source:
Hotel REITsa
−74% −14% −9% 105% −4% 21% 43% 25% −54% −29% 31% −13% −5% 25% 29%
All Equity REITsb −26% 25% 6% 13% −4% 7% 26% 13% −22% −12% 17%
6% −3% 28% 24%
U.S. GDPc
2%
0% 3%
3% 4% 3% 4% 5%
4%
5% 4%
1% 2% 3% 4%
6%
7%
3%
23% −27% −63% 63% 38%
30% −19% −41% 21% 23%
3%
2%
0% −3% 3%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Table 7.4 Hotel REIT performance vs. US GDP
REIT Performance
127
Weighted Average Cost of Capital and REIT Performance
Chapter 1 highlighted the fact that REITs with above-average leverage do not have as much financial flexibility as REITs that operate
with lower levels of debt. As a result, the more highly leveraged REITs
often are not able to take advantage of opportunistic investments.
Research has demonstrated that REIT management teams who operate with more leverage typically underperform their lower-leveraged
peers. This section discusses the perils of debt and the overall importance of a REIT’s cost of capital.
Debt as a Four-Letter Word
The global financial crisis of 2007–2008 illustrated somewhat
dramatically that balance sheets matter. According to an analysis by
S&P Global Market Intelligence, of the 128 REITs that were paying
a dividend in 2007, 84—or roughly two-thirds—cut their dividend
over the following two years. The portfolio of 44 REITs that did not
cut their dividends (Keepers) delivered a 135 percent return from
the beginning of 2008 through 2015, whereas the cutter portfolio
returned only 78 percent. Figure 7.10 plots the performance of these
Keeper versus Cutter REITs. Furthermore, studies by numerous
reputable firms such as Green Street Advisors have demonstrated
how REITs that operate their business with lower levels of debt tend
to outperform other, more leveraged REITs.
The 44 Keeper REITs were those that had relatively lower levels
of debt going into 2007, before the crisis took hold of the markets.
Specifically, the median 2007 debt-to-EBITDA multiples of Keepers
was 5.67 times, and for the Cutters it was 7.23 times, clearly demonstrating how higher leverage levels lead to dividend cuts during the
global financial crisis. (Debt-to-EBITDA is defined and discussed in
Chapter 8.)
Competitive Advantage or Disadvantage—Why Cost of Capital Matters
One of the main reasons why REITs with more highly leveraged
balance sheets tend to underperform is that they miss opportunities
to acquire assets at deeply discounted prices during times of market
dislocation, such as we saw during 2007 through 2009. REITs with
too much debt going into a recession or market crisis simply don’t
have the financial flexibility to capitalize on market opportunities.
128
The Intelligent REIT Investor
Total Return: Dividend Keepers vs. Cutters
150.00
100.00
50.00
0.00
(50.00)
Keepers
15
12
/3
1/
20
14
12
/3
1/
20
13
12
/3
1/
20
12
12
/3
1/
20
11
12
/3
1/
20
10
12
/3
1/
20
09
12
/3
1/
20
08
20
1/
/3
12
12
/3
1/
20
07
(100.00)
Cutters
Figure 7.10 Returns of REITs That Cut versus Those That Did Not Cut Dividends,
2007–2009
Source: S&P Global Market Intelligence.
By contrast, REITs with lower leverage can and do, thereby meriting
a higher relative valuation from investors.
Even in normal market conditions, a REIT’s weighted average
cost of capital (WACC) affects stock price performance. As Chapter
8 discusses in more detail, WACC is calculated by adding up a
company’s debt, preferred stock, and common equity, weighting
each portion of capital by the average cost of each piece. Using
an oversimplified example, if Rockland REIT has $50 million of
debt outstanding with a weighted average interest rate of 5 percent,
$10 million of preferred stock with a 6.5 percent coupon rate, and
$100 million of common equity with an estimated cost of 9 percent,
then Rockland REIT’s WACC is 7.6 percent, which essentially is this
company’s cost of doing business. In order to make a profit on new
investments, Rockland REIT needs to invest its capital into opportunities that return more than 7.6 percent. When competing for an
acquisition property or development opportunity, REITs that have a
REIT Performance
129
WACC that is less than 7.6 percent will have a competitive advantage
over Rockland REIT. Lastly, Rockland REIT’s management, if they
feel they are under pressure to grow, may commit “unforced errors,”
such as investing in high-yielding but low-quality assets. Ultimately,
a poor allocation of capital into subpar assets will translate into a
lower stock valuation for Rockland REIT. Rather than chase growth
through questionable investments, Rockland REIT’s management
would serve shareholders better by paying down debt, which will
help lower its WACC to more competitive levels.
REIT Performance in a Rising Interest Rate Environment
Perhaps one of the greatest misunderstandings about REITs is how
rising interest rates will affect their future profitability. By extension,
some of the most attractive buying opportunities in REITs have
resulted when investors erroneously drove down REIT share prices
because they expected interest rates to increase. The likely root of
confusion is the fact that S&P historically has included REITs in
the Financials sector. As discussed in Chapters 1 and 5, mortgage
REITs are more like banks and may suffer lower profitability during
periods of rising interest rates. In contrast, economics of the leases
in place at equity REITs are not affected by rising rates. Equity REIT
profitability should only be affected on the margin to the extent
they refinance maturing debt at higher interest rates. After S&P
launches the Real Estate GICS sector on September 1, 2016, equity
REIT stock price performance should progressively de-couple from
that of Financials (which will continue to include mortgage REITs)
as investors become more educated about how real estate performs
in a rising rate environment.
Cohen & Steers (NYSE: CNS) periodically publishes research
on REIT industry topics, including how REITs have performed in
past interest-rate cycles. The following observations are reproduced
with their permission from REIT Opportunities in a Rising-Rate Market
(June 2015):
We believe interest-rate-driven corrections may present buying
opportunities for long-term investors . . . . Share prices of REITs
have become increasingly sensitive to bond yields, more often
rising as yields fall and falling as yields rise. Since the first hints
in 2013 that the Federal Reserve could taper quantitative easing
130
The Intelligent REIT Investor
(“QE”). Correlations between REITs and the broad stock market have declined . . ., while correlations with bonds have risen
above historical levels . . . . Periods of rising rates may cause earnings multiples to contract—like they did in April [of 2015]—due
to fears that higher yields will negatively impact property values.
Ultimately, however, we believe REIT performance will be driven
by fundamental factors such as cash flows, competitive positioning and the value of a company’s property holdings relative to
the private market.
Their report expands on the following conclusions:
• Rising bond yields may cause negative market reactions
(among REITs) in the short term. However, REITs tend to
recover as time goes on, as higher yields are often a byproduct
of improving economic growth, which can lead to stronger
demand for real estate.
• U.S. REITs have delivered 19 percent returns on average in
the 12 months following corrections that pushed REIT prices
below their net asset value (see Table 7.5).
Table 7.5 U.S. REIT Returns After Trading Discounts to NAV
12 Months Latera
Months When REITs Began Trading
at Discounts to NAV After 6+ Months
at Premiums to NAV
October 1994
November 1995
August 1998
September 2002
December 2005
May 2007
September 2011
August 2013
September 2014
April 2015
Simple Average
Discounts to
NAV at End
of Month
Total
Return
−0.7%
−0.1%
−7.7%
−0.7%
−10.8%
−3.7%
−6.0%
−5.1%
−1.1%
−1.6%
−3.8%
12.2%
29.2%
2.7%
25.2%
35.1%
−11.9%
32.6%
24.1%
−
−
18.7%
Premium
or Discount
to NAV
−1.7%
19.0%
−9.2%
11.8%
3.8%
−3.3%
5.5%
5.0%
−
−
3.9%
At May 31, 2015. Source: UBS and Cohen & Steers.
Performance data quoted represents past performance. Past performance is no guarantee of future
results.
a
There is no entry when less than 12 months of data is available.
REIT Performance
131
Conclusion
Since 1990, REITs have evolved into a liquid, institutional investment class. With greater liquidity comes greater volatility, which
when harnessed and interpreted appropriately, can lead to greater
returns. As the industry has evolved, company-specific characteristics, rather than broad-brush industry trends, increasingly have
driven REIT stock performance. Property type, WACC, and lease
structure collectively determine total returns in different economic
environments, with property type (that is, fundamental demand)
being the dominant governor. Investors can choose REITs based
on their outlook for the economy and in accordance with their
individual tolerance for risk.
8
C H A P T E R
Analyzing REITs
T
his chapter is designed to provide investors with an
understanding of the performance and valuation metrics required
to evaluate REITs. When used in combination, these measurements
provide insight into the financial flexibility, dividend safety, and
long-term growth prospects of companies.
One of the more enduring challenges in analyzing REITs—
individually and for comparison purposes—is the lack of standardized reporting. Each publicly traded REIT files quarterly Form 10-Q
and annual Form 10-K reports with the SEC. These reports provide
information about a company’s history and summarize its latest
financial performance. Although REITs report results in accordance
with GAAP, each company reports slightly differently. For example,
one company may detail the line items needed to adjust funds from
operation (FFO) to Adjusted FFO (AFFO), whereas another REIT
may not disclose its AFFO calculation.
In addition to reading a company’s earnings releases, and SEC
filings, investors should also obtain the supplemental information
package that most REITs provide (often filed as a Form 8-K with
the SEC). REITs provide non-GAAP, supplemental calculations and
metrics that may or may not be in accordance with GAAP, but which
are helpful for understanding and forecasting their businesses. Most
companies post all their SEC filings, along with their press releases,
on their company websites; Appendix C provides website addresses
for the 223 REITs in the FTSE NAREIT All REITs Index as of
December 31, 2015.
133
134
The Intelligent REIT Investor
Operating Metrics
There are a number of metrics used to assess the relative strength (or
weakness) of a REIT’s operations. The following pages provide key
operating metrics that are germane to understanding REITs.
Net Operating Income (NOI)
Net operating income, or NOI, is similar to an operating company’s
gross profit margin. As shown in Table 8.1, NOI equals the sum
of rental revenues from properties plus any tenant reimbursement
revenue, less all property operating expenses, including fees
paid to any third-party property managers, taxes, and insurance.
(Please refer to Chapter 4 for an overview of leasing terminology.)
Said another way, NOI measures the property-level profit on a
stand-alone basis, excluding the REIT’s corporate overhead or the
effects of financing.
Same-Store (Organic) Earnings
Borrowed from the retail industry, the term same-store generally
refers to revenues, operating expenses, and net operating income
from assets the REIT has owned and operated for 12 or more
months. Isolating the profitability of assets owned for at least
12 months from earnings generated by recently acquired or developed properties enables investors to gauge how competent the REIT
management team is at operating their properties. An increase in
same-store NOI is also referred to as “organic” or “internal” growth
(though these descriptions are not technically precise); an increase
generated from newly acquired or developed buildings is often
referred to as “external growth.” Each company may have slight
variations about how they classify properties into (or out of) their
same-store portfolio; generally, once a company has owned and
Table 8.1 Calculating Net Operating Income (NOI)
Rental revenues
+ Tenant reimbursement revenue (including CAM)
$30.00
15.00
Total property revenues
– Property operating expenses (including property management fee)
– Taxes and insurance
45.00
−15.00
−5.00
Net operating income (NOI)
$25.00
Analyzing REITs
135
operated an asset or for 12 months, that asset is added to the
same-store portfolio.
Growth in a REIT’s same-store NOI measures a REIT management team’s ability to grow earnings internally, or “organically”—
without buying or building new assets. Contractual increases built
into tenant rents, the expiration and re-leasing of space at higher
(or lower) market rents, and changes in occupancy levels generate
increases or decreases in same-store NOI. Among these variables,
a change in occupancy is the dominant driver of fluctuations in
same-store NOI because, in addition to no longer receiving rental
revenue on the vacated space, the landlord also has to pay the basic
operating expenses that no longer get reimbursed by a tenant.
These expenses are basic electricity to keep the space’s temperature
ambient (too cold, and drywall cracks and/or pipes burst; too hot or
moist, and mold can infiltrate), plus property taxes and insurance.
The basic operating costs are not as high as the full expenses incurred
when the space is occupied, but the inability to pass them through
to a tenant significantly impedes a landlord’s operating margin on
the building. The one-two combination punch that vacancy has on
landlord’s operating margins—the loss of revenue, plus increased
operating expenses—is why the demand profile for a property sector
is a dominant factor in determining long-term performance.
The one–two combination punch that vacancy has on landlord’s
operating margins—the loss of revenue, plus increased operating
expenses—is why the demand profile for a property sector is a
dominant factor in determining long-term performance.
(Please also refer to Chapter 7.) In short, vacancy is not profitable,
and property sectors for which demand remains steady during economic downturns tend to outperform other sectors.
‘Earnings Growth’ for REITs Is ‘FFO Growth’
REITs calculate earnings growth like any company: as the percentage change in earnings for the most current reporting period, versus
results from the prior year’s comparable period, as follows:
REIT earnings growth
[(
)
]
Current period FFO per share
=
− 1 × 100
FFO per share for same period a year ago
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The Intelligent REIT Investor
Unlike C-corporations, whose growth is measured as a change
in earnings per share (EPS), REITs’ growth is measured by the
year-over-year change in funds from operations (FFO). In 2003, the
SEC officially recognized NAREIT’s definition of FFO as a supplemental earnings measure. Accordingly, when referring to a REIT’s
earnings, analysts and investors are referring to FFO, not EPS.
A REIT increases its FFO by combining same-store growth with
external growth derived from properties the REIT acquired or
developed, less the FFO from any properties sold. Many REITs also
have “other income” that is separate from the profit generated by
their buildings. Since the REIT Modernization Act of 1999, REITs have
had more flexibility to provide tenant services through taxable REIT
subsidiaries (TRSs). (Please refer to Chapters 6 & 7 for more information.) Since that legislation went into effect, many REITs now
also derive small amounts of additional income from real estate–
related services and businesses. FFO also includes the REIT’s general
and administrative (G&A) costs. Comparing the G&A as a percent
of real estate revenues across different REITs in the same property
type is a quick way to compare the relative efficiency with which
respective management teams operate their real estate. Lastly and
similar to EPS, FFO per share also accounts for the effects of any
changes to a REIT’s capital structure in the form of higher (or
lower) interest expense and/or a different diluted share count.
As with any industry, higher earnings growth generally merits a
higher valuation, provided that the quality of earnings is sound. For
REITs, investors typically ascribe a higher multiple to “better quality”
earnings, namely those derived from the business of owning and leasing real estate. Investors generally ascribe a lower valuation to earnings generated from areas of the business that are less predictable,
such as income from merchant development or third-party property
management activities.
Management’s Track Record as a Screening Tool
There are over 200 publicly traded REITs. Screening companies
using meaningful, easy-to-find performance results will help narrow the list of investment prospects. Over time, better seniormanagement teams should generate above-average same-store
NOI growth and superior annual total returns for shareholders.
Assessing management’s performance by comparing the last five
or more years of reported same-store NOI growth and annual total
returns against what that company’s peers produced should help
investors quickly assess if the REIT they are evaluating tends to
Analyzing REITs
137
perform on, below, or above-par versus REITs in the same property
sector. S&P Global Market Intelligence, whose website is listed in
the Further Resources section of this book’s conclusion, has one
of the more robust databases of historical same-store and other
data on individual REITs dating back to the mid-1990s. NAREIT’s
website, www.reit.com, also provides a host of historical company
data, including annual total returns.
Profitability Metrics
Like C-corporations, REITs report net income and EPS calculated
in accordance with GAAP. According to GAAP, however, REITs
must depreciate the cost of their properties (excluding the amount
allocated to the cost of land) over the useful life of an asset. Yet
well-located and -maintained buildings tend to appreciate in value
over time. In 1991, to address the discrepancy between GAAP rules
and current market values for real estate, the REIT community
adopted FFO as a supplemental measure of earnings per share. FFO
and two additional supplemental performance metrics—adjusted
FFO (AFFO) and cash (or funds) available for distribution (CAD or
FAD)—are described in the paragraphs that follow, and Table 8.2
illustrates the adjustments that need to be made to reconcile “Net
income available to shareholders” to an estimate of CAD.
Funds from Operation
Funds from operation is a supplemental though more broadly used
measurement of REIT earnings, created by the REIT industry in 1991
and recognized by the SEC in 2003. According to NAREIT’s latest
whitepaper on the topic, FFO equals:
• Net income, as computed in accordance with GAAP,
excluding:
◦ Real estate depreciation and amortization
◦ Gains (or losses) on the sales of previously depreciated operating properties
◦ Impairment write-offs on previously depreciated operating
properties
• Adjust to include the REITs share of FFO (or losses) in unconsolidated entities
NAREIT’s definition of FFO excludes preferred dividends. If net
income reflects dividends paid to preferred share (or unit) holders,
then add the preferred dividends back, as well. Note that the gains
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The Intelligent REIT Investor
Table 8.2 Reconciliation of GAAP Net Income to CAD
Net income (loss) available to common shareholdersa
+ Preferred stock dividends paid to preferred share & unit holders
Net incomea
+ Real estate depreciation and amortization
− Gains on the sale of previously depreciated operating properties sold,
net of income taxes
+ Impairment write-offs on previously depreciated operating properties
± Reconciling FFO related to noncontrolling interestsb
Funds from Operation (FFO) attributable to the Company—per NAREIT
− Recurring capital expendituresc
± Adjustment for straight-lining of rentsd
+ Impairment charges on undepreciated property, net of income taxese
− Gain on sale of undepreciated property, net of income taxese
+ Amortization of stock compensation
+ Amortization of deferred financing costs
± One-time items, such as the losses on the early extinguishment of debt
Adjusted FFO (AFFO)
− Capitalized interest expense
− Scheduled principal amortization payments on debtf
Cash Available for Distribution (CAD)
a
As defined by GAAP. If starting with net income available to common shareholders, adjust back to “Net
income” to begin calculating FFO in accordance with NAREIT’s definition.
b These generally are partnerships and joint ventures in which the REIT owns less than a controlling interest.
c
Includes non–revenue enhancing items, such as new carpeting or painting the walls of a space, as well
as leasing commission paid to a leasing agent. In contrast, non-recurring capital expenditures add value
to or extend the life of a property and include major structural items, such as expanding a property or
constructing a parking deck. Both recurring and non-recurring items can be capitalized. However, only
recurring capital expenditures are deducted in calculating AFFO.
d In accordance with GAAP, REITs “straight line” the rental income they are contractually entitled to receive
for each lease. This is done by reporting the average rent (the sum of the total rent to be received, divided
by the length of the lease), as opposed to the actual cash rent paid by the tenant. The straight-lined
adjustment REITs report is the aggregate amount to be added to or subtracted from the GAAP rents
reported on the income statement to arrive billable rent received in a reporting period.
e
Undepreciated property includes land and recently developed but not yet stabilized buildings (i.e., buildings that were not yet included in a REIT’s operating portfolio).
f
Excludes balloon or maturing principal payments.
and losses on undepreciated property—such as land or recent development projects that were not part of the REIT’s in-service (or operating) portfolio—and any impairments on undepreciated property are
included in calculating FFO.
Many REITs also report a ‘core’ FFO that better reflects their specific
operations than NAREIT’s White Paper definition. When comparing
companies, investors need to be aware of (and adjust for) major
differences.
Analyzing REITs
139
Table 8.3 Adjusting NAREIT-Defined FFO to Account for Preferred Dividends
Net incomea
+ Real estate depreciation and amortization
− Gains on the sale of previously depreciated operating properties sold,
net of income taxes
+ Impairment write-downs on previously depreciated operating properties
± Reconciling FFO related to noncontrolling interestsb
Funds from Operation (FFO) attributable to the Company—per NAREIT
− Preferred stock dividends paid to preferred share & unit holders
Diluted FFO available to common share and common OP unit holdersc
a
As defined by GAAP, and before payment of dividends to preferred share and preferred unit holders.
These generally are partnerships and joint ventures in which the REIT owns less than a controlling interest.
c
This will be the numerator for calculating diluted FFO per share.
b
As just mentioned, NAREIT’s definition of FFO does not include
the effect of dividends paid to holders of a REIT’s preferred stock and
preferred OP units. If a REIT has preferred stock or preferred OP
units outstanding, its Net Income will be higher than its Net Income
Available to Common Share & Unit Holders. In such instances, subtract the preferred dividends paid to these investors in order to calculate the numerator used to compute diluted FFO per share, as shown
in Table 8.3. (The denominator will be the sum of the REIT’s common shares and common OP units outstanding at the end of the
reporting period.)
Adjusted Funds from Operations (AFFO)
Adjusted funds from operations (AFFO) is a more precise measure of a REIT’s earnings than FFO because it adjusts for GAAP
accounting conventions and for recurring capitalized expenditures
(see footnotes c and d of Table 8.2, as well as the Glossary). As such,
AFFO represents a more normalized or recurring form of FFO.
AFFO is calculated by adding any amortized expenses (which are
noncash items) to FFO, then subtracting a “normalized level” of
recurring capital expenditures, and adjusting for straight-lined
rents. (Recurring capital expenditures and straight-lined rent are
also defined in the Glossary.)
Examples of recurring capital expenditures include leasing
commissions and tenant improvement paid to lease a space, both
of which are capitalized and then amortized (that is, averaged)
over the life of the lease. Observing the last three-to-five years of
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The Intelligent REIT Investor
historical data is helpful in estimating a reasonable level of recurring
capital expenditures for each REIT. Recurring capital expenditure
information typically can be found in the AFFO reconciliations
REITs provide in their quarterly supplemental packages. To estimate
future spending, divide the average annual recurring capital expenditures by the average square feet leased in each year, then multiply
the resulting “CapEx per square foot” number by the amount of
occupied square feet forecasted for future years. Note that square
feet in this calculation should only include space associated with a
REIT’s in-service portfolio. Development square footage should not
be included.
Lastly, the effects of any one-time items should be reversed. For
example, it is customary to add back charges that get written off
when REITs redeem preferred shares. These charges are the original underwriting costs incurred when the REIT issued the preferred
stock. They are noncash expenses associated with the redemption,
and are nonrecurring. Therefore, it makes sense to exclude them
when calculating AFFO.
Cash Available for Distribution (CAD)
Cash available for distribution (CAD) estimates the cash a REIT has
available to pay dividends and is the most meaningful indicator of
dividend safety. Not every analyst or investor goes the extra mile
to calculate CAD, and NAREIT offers no opinion on it. CAD is
calculated by subtracting capitalized interest expense and principal amortization payments due on secured debt—excluding any
principal amounts that are maturating; these “balloon payments”
are accounted for in the financing activities section of a company’s
Statement of Cash Flows and typically get refinanced with new debt
when they mature.
Balance Sheet Metrics and Analysis
A REIT’s balance sheet can also provide important information
about dividend safety or a REIT’s ability to grow FFO. The following
metrics enable investors to assess a REITs’ financial flexibiltiy.
Leverage
The REIT industry has progressively de-levered over the decades.
Prior to 1990 it was not unusual for real estate companies to finance
80 percent or more of their property values with debt. Using large
Analyzing REITs
141
amounts of leverage (“levering up”) to acquire or develop buildings
results in impressive FFO per share growth; however, it also adds
significant risk and, historically, when combined with an economic
slowdown, has been the root cause of many private real estate company bankruptcies. In the 2000s, leverage came back in vogue, only to
end poorly for many overleveraged private landlords when the global
financial crisis began to unfold in 2007.
When assessing the financial health of any real estate company or
REIT, investors may want to remember one truism:
“Debt” is a four-letter word
In contrast to the private property market, REITs historically have
maintained a more disciplined, conservative approach to financing
operations with debt. To wit, as of December 31, 2006, the REIT
industry’s average debt-to-gross book ratio was 57 percent. Out of
the 130 REITs that composed the FTSE NAREIT All REITs Index
going into 2007, only one REIT, General Growth Properties (NYSE:
GGP), ended up reorganizing under Chapter 11 bankruptcy law. As
discussed in Chapter 3, General Growth’s debt-to–gross book ratio at
the end of 2006 was 74 percent, or 17 percentage points greater than
the industry average.
Debt-to–Total Market Capitalization Ratio
As of December 31, 2015 and according to NAREIT, equity REITs
average debt-to–total market capitalization ratio was 36.0 percent.
This ratio is calculated by dividing a company’s total debt outstanding
by its total market capitalization, which is the sum of the following:
• Total debt outstanding
• The liquidation value of any preferred stock outstanding, calculated as the liquidation value per share (typically $25) times
the number of preferred shares outstanding; a company’s supplemental package and/or the footnotes to its periodic SEC filings typically contain the liquidation values of preferred shares
• The REIT’s Equity Market Capitalization (EMC or equity market
cap), calculated as the current stock price times the sum of all
common shares and OP units outstanding:
EMC = (Common shares + OP units) × current stock price
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The Intelligent REIT Investor
The combined formula for calculating debt-to–total market capitalization is as follows:
Debt-to–total market capitalization
=
total debt outstanding
total debt + preferred stock at liquidation value
+ equity market capitalization
As discussed in Chapter 3, a debt-to–total capitalization ratio
changes depending on a REIT’s current stock price, resulting in
leverage being over- or understated. To obtain a more accurate idea
about how leveraged a REIT is, calculate its debt-to–gross book value
ratio.
Debt-to–Gross Book Value Ratio
Gross book value, which is often called gross asset value, can be
calculated by taking total assets listed on the balance sheet of the
REIT’s financial statements, less any goodwill or intangibles, plus
any accumulated depreciation and amortization (generally listed in
the footnotes to the financial statements), as shown in the following
equation.
Debt-to–gross asset value
=
total debt outstanding
(total assets − intangibles) + accumulated depreciation
As of December 31, 2015, the average debt-to–gross asset ratio of
REITs in the FTSE NAREIT All REITs index was 46.4 percent.
Debt-to-EBITDA Ratio
REITs that are investment-grade rated have to operate their
businesses within the leverage limits (or covenants) imposed on
them by the ratings agencies. The largest three such agencies in the
United States are Fitch, Moody’s, and Standard & Poor’s. One of
the most critical ratios the investment community focuses on is a
REIT’s debt-to-EBITDA, which measures how many years it would
take a company, in theory, to pay off its leverage using the most
recent quarter’s earnings before interest, taxes, depreciation, and
amortization (EBITDA). For example, a debt-to-EBITDA ratio of
Analyzing REITs
143
4.5× implies it would take the REIT four-and-a-half years to repay its
debt, assuming the most recent quarter’s EBITDA is recurring.
Calculating a REIT’s debt-to-EBITDA sounds straightforward:
Divide total debt outstanding by the most recently reported
quarter’s EBITDA, annualized. However, in practice, there are
many adjustments that need to be made to the denominator to
ensure the EBITDA is recurring. Many (but not all) REITs that have
investment-grade ratings disclose their debt-to-EBITDA ratio in the
“debt analysis” pages of their quarterly supplemental information
packages. A lower ratio equates to lower levels of debt and, implicitly,
a more secure common dividend.
Weighted Average Cost of Capital (WACC)
Often referred to as a company’s “cost of capital,” the weighted average cost of capital (WACC) is the average return a company expects
to pay all its stakeholders: lenders, preferred shareholders, and
common shareholders. WACC is calculated by proportionately
weighting the cost of each of the three types of capital—debt,
preferred, and common shares—as a percentage of the company’s
total market capitalization (defined earlier in this chapter). The
formula for calculating WACC is as follows:
D
P
E
WACC =
× Dc +
× Pc +
× Ec
TMC
TMC
TMC
or simply:
WACC =
(D × DC ) + (P × Pc ) + (E × Ec )
TMC
where:
D is the total amount of debt outstanding
Dc is the average interest rate on total
P is the liquidation value of all preferred stock*
Pc is the average dividend rate on all preferred stock
E is the equity market capitalization*
Ec is the cost of equity
TMC is the total market capitalization*
∗
These calculations are discussed in Chapter 7.
Determining the cost of equity for the preceding calculation is
not as easy as looking something up in the company’s SEC filings
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The Intelligent REIT Investor
or supplemental package. Technically, common stock does not have
an explicit cost associated with it the way that loans and preferred
stock issuances do with their respective interest rates and dividend
coupon rates. One accepted method is to use the average expected
total return for the industry, which for REITs is 10–12 percent (please
refer to Table 2.1 in Chapter 2). To be more precise, use the average
total returns specific to each property sector, as shown in Table 7.1
of Chapter 7. Another method for calculating a company’s cost of
equity is to use the following formula:
Ec =
Current Dividend, Annualized
+ Average Dividend Growth
Current Share Price
There are other methods for calculating the cost of equity, some
of which are more scientific, some of which are more subjective. As
long as the approach for estimating the cost of equity is consistently
applied, then the relative WACCs should be meaningful for comparing across different REITs.
A higher WACC could signal a company’s capital allocation is
out-of-whack.
Companies with a higher WACC implicitly are riskier than
companies with lower costs of capital. Before investing, be sure to
understand if a company’s WACC is higher than its peers because
the company is newer to the public market and, as a result, perhaps
has a less institutional quality balance sheet. Provided investors and
analysts believe management is allocating capital wisely, a company
can lower its WACC over time by refinancing maturing debt with
new debt that has a lower interest rate, or by redeeming existing
preferred stock by issuing new, lower-cost preferred stock, and also
by increasing its common share price. Each of these tactics will
lower a company’s WACC, but they are only possible if management
consistently executes a growth strategy that investors deem to be a
good balance between risk and returns.
Alternatively, a company may have a higher WACC than its
peers because its management team does not allocate capital well.
A company that grows FFO by levering up its balance sheet with
short-term, variable rate debt—which carries a lower interest rate
than long-term debt—may fool investors for a little while; ultimately,
Analyzing REITs
145
when that company has to refinance debt at higher rates, or,
more likely, if investors chose to sell their shares because they are
uncomfortable with the increased leverage, the REIT’s stock price
will decline, further increasing the company’s WACC.
Valuation Metrics
Valuation is a critical step in selecting which REITs to buy, hold, or
sell. The following metrics provide different ways to measure a REIT’s
relative value versus a group of peer companies or on an absolute
basis.
Price/Earnings Multiple
As was discussed at the beginning of this chapter, REITs trade off
expected FFO per share estimates rather than EPS. Accordingly,
REIT earnings multiples are expressed as FFO multiples, calculated
simply as the current stock price divided by current or next year’s
FFO per share estimates, depending on how forward looking your
analysis is. The equation to calculate price/earnings (P/E) is:
A REIT’s P∕E
= P∕FFO =
current stock price
the current or next year’s estimate of FFO per share
A lower FFO multiple may indicate a REIT is trading at a bargain
price. So if Rockland REIT trades at 10.0× next year’s estimate FFO,
and REIT ABC with a similar portfolio of assets trades at 12.5×, Rockland REIT may be a good value relative to REIT ABC. If there is
no fundamental problem with Rockland REIT’s markets and operations, then its shares probably represent a good value. Looking at
other metrics, such as FFO growth and leverage, will help determine
the answer.
PEG Ratios
Investors look at FFO multiples as a simple calculation of the
relative valuation of REITs within their sectors. Although FFO
multiples are helpful indicators for assessing relative value, price
multiple-to-earnings growth, or PEG ratios, are a better indicator
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The Intelligent REIT Investor
of how much an investor is paying today for a company’s expected
earnings growth. PEG ratios for REITs are calculated by dividing
the price/FFO multiple by expected future growth in FFO. For
example, if a REITs FFO multiple on next year’s estimated FFO is
9.5×, and the REIT’s FFO per share is expected to increase 8 percent
next year, the PEG ratio is 9.5 divided by 8, which equals 1.2×. This
can be calculated using the following equation:
A REIT’s PEG ratio =
next year’s FFO multiple
next year’s expected growth in FFO per share
Because PEG ratios isolate the growth component of value,
they provide investors with a clearer understanding of how much
they are paying today for future earnings. Assuming comparable
risk profiles among companies, lower PEG ratios represent better
relative values for investors. One caveat regarding PEG ratios is that
in years when companies are expected to deliver flat or modestly
negative earnings growth, PEG ratios should be calculated using
a longer-term (three–five-year) estimate of earnings potential for
each company.
Dividend Yield
At December 31, 2015, the average equity REIT offered investors
a current return, or dividend yield, of 4.3 percent, which was 200
basis points above the yield on 10-year U.S. Treasury notes, and
210 basis points greater than the S&P 500 Index’s yield. Unsurprisingly, many investors choose to invest in REITs solely for their
current yield. Chapter 3 discussed REIT dividends at length, so this
section will simply restate two points. First, a REIT’s current yield is
calculated as the current dividend annualized (multiplied by four,
in most cases), divided by the current stock price:
Current Yield =
Current quarterly dividend × 4
Current price per share
Second, because many investors hold investments for several
years, it is also important to understand the concept of yield on cost,
which is calculated by dividing the current dividend annualized by
the investor’s cost basis in the REIT’s stock:
Current quarterly dividend × 4
Yield on Cost =
Shareholder’s per share cost basis
Analyzing REITs
147
Three General Rules about Dividend Safety
1. REITs that own property types with short-term lease revenues carry more risk of cutting their dividends than those
with longer-term leases.
2. Dividends tend to be more at-risk in companies whose management teams incur too much leverage. A debt-to–gross
asset value of 50 percent generally should be the absolute
maximum amount of leverage (and even that level may prove
to be too high, depending on the property sector).
3. REITs with dividend yields that materially exceed the industry’s average tend to be companies with significantly more
corporate risk and less secure dividends. (Please see the discussion of sucker yield in Chapter 3.)
Bottom line: If a REIT’s yield looks too good to be true, it probably is.
Dividend Safety
Although Chapter 3 addressed dividend safety, the point bears
repeating. Although the contractual nature of leases makes most
property sector dividends reasonably secure, REITs have cut or
suspended their dividends in times of financial crisis—both in the
wake of the S&L crisis of the late 1980s/early 1990s, and more
recently in response to the global financial crisis of 2007–2008.
Putting aside these two extreme economic times, REIT dividends
tend to be sustainable. By calculating a REIT’s dividend payout ratio,
discussed next, investors can assess how secure the dividend is, at least
in the near term.
Dividend Coverage, or Payout Ratios
FFO, AFFO, and CAD payout ratios are a common means of
evaluating the relative security of a company’s dividend. FFO is
quoted more broadly because stock analysts provide Thomson First
Call, Bloomberg, and S&P Global Market Intelligence with their
estimates of FFO per share for companies. Increasingly, analysts are
also furnishing AFFO per-share estimates on REITs they analyze,
but the practice is not yet uniform. As discussed in Chapter 7,
FFO payout ratios indicate the relative ability of a REIT to meet its
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The Intelligent REIT Investor
dividend obligation, in that, if the payout ratio is less than 1.0, the
dividend is reasonably secure:
current quarterly dividend∗ × 4
Dividend payout ratio =
next year’s FFO† per share estimate
Note: * If the REIT pays a monthly dividend, multiply the most recent dividend by 12.
†
Use AFFO or CAD per-share estimates, if available, instead of FFO.
Dividing the annualized dividend by the next year’s estimate of
AFFO or CAD per share is a better method for gauging dividend
safety than using FFO estimates; however, investors may need to do the
spadework to create their own estimates of both metrics, if stock analysts providing research on the REIT do not provide these estimates.
Dividend Discount Model
Investors who are interested in owning REITs primarily for dividend
income should also employ the dividend discount model to evaluate
whether a REIT’s shares are fairly priced. The following formula will
calculate the present value of a REIT’s expected future dividends,
using a discount rate and a reasonable expected annual growth rate
for the current dividend. If the fair value for a REIT calculated using
the dividend discount model is higher than the price at which the
stock is trading, then the stock most likely is a good value.
Annualized dividend per share
Fair stock price =
Discount Rate − Dividend Growth Rate
Dividend Discount Model Example
To illustrate the dividend discount model with a practical example,
assume that Rockland REIT:
• Pays a dividend of $0.25 per share per quarter
• Has increased its annualized dividend 3 percent, on average,
for the past five years
• Has a cost of equity (or discount rate) of 12 percent
Based on the dividend discount model, $11.11 is a fair value for
Rockland REIT’s shares:
$11.11 = ($0.25 × 4) ÷ [12% − 3%]
If Rockland REIT’s shares are trading below $11.11, then the
stock most likely is a good investment from a valuation standpoint.
Analyzing REITs
149
In terms of the inputs, you can use a company’s historical
annualized growth rate in its dividend, which often is cited in an
annual report to shareholders or company presentation posted
on the company’s website. Determining which discount rate, or
cost of equity, to use is more difficult. In addition to the methods
discussed earlier in this chapter related to WACC, some investors
simply add an equity risk premium of 500 basis points to the 10-year
U.S. Treasury bond rate (the risk-free rate).
Net Asset Valuation (NAV)
One way to assess if the managers of a REIT are prudent allocators
of shareholder capital it to observe the investment tactics they
use when their stock is trading significantly above or below net
asset value (NAV). NAV estimates the current market value of a
REIT’s properties, net of other non–real estate assets and liabilities.
Investors prefer NAV per share over gross book value per share
because the latter does not account for changes in the value of
the underlying land on which properties are built, or the future
earnings potential (and associated change in market value) of real
estate assets.
REITs whose shares trade at a premium to NAV have a cost of
capital advantage and should continue buying and/or developing
to grow their portfolios (assuming they issue enough common stock
to maintain their prior debt ratios, discussed earlier). In contrast, if
a REIT’s shares are trading at a significant discount to NAV, management should shrink its portfolio by selling the lowest performing or lowest growth assets and use the proceeds to pay down debt
(or redeem any callable preferred shares). If the discount persists
for several quarters, management should also consider buying back
common stock—but only if they can do so without increasing their
total debt.
REITs whose stocks trade at premiums to estimated NAV per
share might have some specific reason, such as their property
Stock Price Above NAV = Green Light on Growth
Stock Price Below NAV = Red Light on Growth
150
The Intelligent REIT Investor
sector or markets may be in favor with investors. Alternatively, the
premium may indicate the shares are overvalued. Conversely, if a
stock is trading at a steep discount to NAV per share, then either
the market is undervaluing the business, in which case investors can
buy shares at an attractive sale price; or the investment community
believes management is destroying shareholder value, in which case
the shares are cheap for a reason and should be avoided.
According to analyses published by Green Street Advisors,
historically, REITs trade at a modest premium to NAV per share, as
the market generally prescribes some premium for liquidity and an
even greater premium to REITs with management teams that have
consistently added value through rigorous property management
and asset allocation tactics. That said, according to an analysis
provided by S&P Global Market Intelligence, REITs traded at an
average 2.7 percent discount to NAV at the end of 2015. Investor
concerns about slowing global economic growth and the potential
for higher interest rates from Federal Reserve actions caused most
REIT property types to finish that year below NAV (see Figure 8.1).
Because NAV increasingly dominates investor buy-and-sell decisions,
Self-Storage
30.8%
Manufactured Homes
22.3%
Other Retail
11.4%
Health Care
6.3%
Apartments
1.2%
Shopping Centers
0.5%
Specialty
–1.9%
REIT Industry
–2.7%
Industrial
–6.2%
Malls
–11.5%
Office
–12.3%
Diversified
Hotel
–13.5%
–26.4%
–35%
–25%
–15%
–5%
5%
15%
25%
35%
Figure 8.1 REIT’s Average Premium (Discount) to NAV at December 31, 2015
(Includes U.S. REITs with at least three NAV per-share estimates. Property sectors
are weighted by market capitalization.)
Source: S&P Global Market Intelligence.
Analyzing REITs
151
Table 8.4 Basic Calculation of NAV per Share
Cash NOI “run rate” for recent quarter
× 4 to annualize
Annualized adjusted cash NOI
× (1 + 3 percent annual same-store growth assumption)
Annualized adjusted cash NOI
÷ Cap rate
Fair market value of a REIT’s in-service properties∗
Adjusted for:
+ Accounts receivable, cash, and other tangible assets,
net of current liabilities
+ Fair value of properties held for sale, net of related debt
+ Properties under development at costs invested to date
Total
− debt
− Preferred stock, at liquidation value
Net asset value (NAV)
Shares and OP units outstanding at the end of the quarter
NAV per share (rounded to nearest dollar)
∗
$10,000
×4
$40,000
×1.03
$41,200
5.5%
$749,100
1,500
50,000
20,000
−250,000
−150,000
$420,600
25,000
$16.82
Number is rounded for presentation purpose.
the remainder of this chapter demonstrates how it may be calculated
for Rockland REIT.
Calculating NAV
Although there are several calculations involved in estimating a
REIT’s NAV, the basic concept is simple: estimate the current market
value of the REIT’s portfolio, then add any other tangible assets,
subtract all liabilities, and divide the sum by the shares and OP
units outstanding. Table 8.4 provides a simplified example of an
NAV calculation, after which the five major components of NAV are
broken down in more detail.
Step 1: Estimating a Quarterly Run Rate for “Cash” NOI
The first step in calculating NAV is to calculate a REIT’s billable NOI
(as opposed to GAAP NOI) for the most recently reported earnings
period. (NOI was discussed at the beginning of this chapter.) Note
that billable (or contractual ) NOI is often referred to as “cash” NOI.
The goal of step 1 is to isolate the cash NOI due from a REIT’s
in-service portfolio and adjust it for any assets bought, sold, or placed
into service during the most recent reporting period. In-service
properties are ones that are not under development. Other assets,
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The Intelligent REIT Investor
such as income from a business services TRS or properties still under
construction, are valued in a later step.
Cash NOI Estimation
Estimate Cash NOI
for most recently
reported quarter:
Rental revenues + tenant
recoveries reported
for Q
− Property operating
expenses for Q
Net operating income
(NOI) reported for Q
± Straight-lined rent
adjustment
Cash NOI for Q
First
Approach
Second
Approach
$15,000
–
Income statement
−6,550
–
Income statement
8,450
–
−1,000
–
$7,450
$7,500
Likely Source
AFFO calculation
(supplemental)
• The first approach represents financials of a REIT that does not
disclose cash NOI, in which case investors need to use line items
from the income statement and the straight-lined rent adjustment disclosed in the reconciliation from FFO to AFFO (likely in
the supplemental information package).
• The second approach shows the shortcut investors can take
advantage of in instances where REITs report their cash NOI
(most likely in the supplemental information package available
on their websites).
• HFS vs. Discontinued Operations—The $50 difference between
the two cash NOI numbers exists because in the first approach,
the REIT has assets held for sale (HFS) that qualify for discontinued operations treatment; as a result, their NOI is not in continuing operations. In the second approach, the HFS assets do not
qualify for discontinued operations treatment, so their NOI is still
reported in continuing operations.
Properties that are in-service but not collecting rent because they
are vacant are not directly valued by NAV. One of the fastest ways a
REIT can grow its NAV per share is to re-lease vacant space.
Analyzing REITs
153
Straight-Lined Rent In compliance with GAAP, REITs straight-line
the rental income they receive by reporting the average annual rent
to be received over the life of a lease instead of the contractual rent
due each period. The straight-lining of rent adjustment a REIT
reports is the amount to be added to or subtracted from GAAP rents
(reported on the income statement) to arrive at “cash” rents. The
following example demonstrates the straight-lining of rents:
Example of Straight-Lining Rents
Year 2
Year 3
Year 4
$15.00
5,000
$16.50
5,000
$18.00
5,000
$19.50
5,000
Cash rent to be received (“A”)
$75,000
$82,500
$90,000
$97,500
Total cash rent to be received
÷ Lease length (in years)
$345,000
4
$86,250
$86,250
$86,250
3,750
11,250
$90,000
$97,500
Contractual rent per square foot
× Square feet leased
Average rent reported annually for
GAAP (“B”)
Therefore:
GAAP rent reported on financial
statements
− Straight-lined rent adjustment
(A – B)∗
Cash rent due
Year 1
$86,250
$86,250
(11,250)
$75,000
(3,750)
$82,500
∗
Note in this example that after the halfway point in the lease, the straight-lined
rent adjustment becomes positive, meaning that the NOI calculated from the REIT’s
income statement will need to be increased by the straight-line adjustment amount.
Step 2: Estimating a Quarterly Run Rate for Cash NOI
Very few REITs provide good disclosure on what their quarterly cash
NOI “run rate” from in-service properties is. Run-rate cash NOI is the
cash NOI calculated in step 1, adjusted for the estimated addition
(or deletion) of cash NOI in the period related to the REIT’s investment activity. The following example demonstrates how to adjust a
REIT’s cash NOI to a run-rate that can serve as the basis of the NAV
calculation:
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The Intelligent REIT Investor
Step #2 – Adjustments to Cash NOI from Step #1 to
estimate “run rate” for the in-service portfolio:
Cash NOI for Q, calculated in Step #1
+ Unaccounted NOI from:
• Acquisitions made during Q
• Developments placed into service in the Q
– NOI from assets sold during the Q
– NOI from assets held for sale (“HFS”)
Net adjustment to cash NOI from investment
activity in the Q
First
Second
Approach Approach
$7,450
$7,500
17
58
−20
--
17
58
−20
−50
56
6
$7,506
$7,506
(A)
(B)
(C)
(D)
Cash NOI “run rate” for Q
Explanations of footnotes A through D in Step 2 are as follows:
A
The company acquired a building in the middle of the quarter. The purchase
price was $2,500 and the property has a stabilized return (or ‘yield’) of 5.5%.
Accordingly, only half of the asset’s NOI was included in the most recent reported
quarter.
B
The company developed a building for $5,000 that has a stabilized yield of 7.0%
and placed it into service on the 60th day of the 90-day quarter. Therefore, only one
month (30 days) of NOI was in the latest quarter’s NOI; two month’s NOI needs to
be added.
C
On the 30th day of the 90-day quarter, the company sold an asset for $3,000 and
at an exit cap rate of 8%. One month of NOI from this asset was in the most recent
quarter’s NOI and needs to be subtracted.
The table below calculates the amount of cash NOI that needs to be added to or
subtracted from cash NOI to get to a run-rate:
Cap
Rate
Total Qtly
NOI NOI
Months of NOI
to Adjust
Adjustment
to Cash NOI
A—Acquisition
$2,500 5.5%
B—Development $5,000 7.0%
C—Asset sold
($3,000) 8.0%
$138 $34
350 88
−240 −60
+45∕90 = 1∕2
+60∕90 = 2∕3
−30∕90 = ( 1∕3)
$17
58
−20
Adjustment
Total
Cost
Total estimated adjustments from investment activity in the Q
D
$56
If a company has assets held for sale (“HFS”), investors need to understand if the
assets also qualify for discontinued operations treatment. If they do, then no adjustment is required. The Second Approach reflects a scenario where HFS assets do not
qualify as discontinued operations. Accordingly, their NOI needs to be deducted to
arrive at a run rate for NOI. This scenario assumes the assets HFS have a book value
of $2,500 and generate an 8.0% cash NOI yield, resulting in quarterly NOI of $50
(calculated as $2,500 × 8%, divided by 4).
Analyzing REITs
155
Step 3: Annualize the Quarterly Run Rate for Cash NOI & Adjust
for Same-Store Growth
The third step is to annualize the cash NOI run rate calculated in
Step 2, plus make a reasonable assumption about what degree these
earnings will grow (or contract) over the next 12 months:
First
Approach
Second
Approach
Cash NOI Run Rate for Q (from Step #2)
×4
$7,506
×4
$7,506
×4
Cash NOI Run Rate, annualized
× 2% same-store growth assumption
30,022
× 1.02
30,022
× 1.02
$30,623
$30,623
Annualized cash NOI, assuming 2% same-store growth
Cash NOI annualized, with growth
Same-Store Growth Assumption As Table 8.5 shows, each property
sector exhibits certain growth or contraction during times of economic expansion or decline. Investors should make a reasonable
assumption, based on the historical same-store growth a company
has achieved, tempered by the investors’ outlook on the broader
economy.
Step 4: Calculate Fair Market Value of the In-Service Portfolio
The fourth step uses the annualized cash NOI calculated in Step 3 to
estimate the fair market value of the REIT’s in-service properties. As
the example below shows, divide the annualized cash NOI calculated
in Step 3 by an appropriate cap rate.
Table 8.5 Historical Same-Store NOI Growth Rates for Major Property Types
Apartments
Industrial
Malls
Office
Self-Storage
Shopping Centers
1999–2008
2009–2010
2011–2015
2.4%
2.0%
3.3%
0.0%
3.8%
2.3%
−2.8%
−4.4%
−0.6%
−1.1%
−1.4%
−2.3%
6.0%
3.2%
3.0%
1.5%
8.3%
2.9%
Source: S&P Global Market Intelligence.
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The Intelligent REIT Investor
Calculate Fair Market Value
of in-service portfolio:
Annualized cash NOI (from Step #3)
÷ Cap rate
Fair market value of in-service properties
First
Approach
Second
Approach
$30,623
6.50%
$30,623
6.50%
$471,116
$471,116
Fair market value is the price a buyer would pay today for the
REIT’s assets, before taking into consideration the assumption of
any debt and preferred shares the REIT has used to finance their
purchase. In an actual transaction, the buyer would analyze each
property and calculate the present value of expected cash NOI from
the portfolio over 5 or 10 years. A short-hand way of expressing the
resulting value is to use a capitalization rate, or cap rate.
The cap rate is expressed as the quotient of the portfolio’s annualized adjusted cash NOI divided by the purchase price a buyer is
willing to pay. In the analytical world, there is always a lot of debate
about which cap rate is appropriate for calculating a REIT’s NAV.
Although there is no “right answer,” knowledge of the debate should
help investors adopt one that is defensible.
Capitalization Rates – Capitalization rates (or more commonly, cap
rates) are a measure of the expected unleveraged return on assets.
Another way to think about cap rates is that they are the inverse of a
P/E ratio, where “price” is the fair market value (or purchase price)
of the asset, and “earnings” are the property’s cash NOI. Cap rates
for the same type of property may differ vastly based on the general
quality of the physical assets, as well as the quality of its locations
(based on the relative strength of the markets’ supply-and-demand
fundamentals), and buyer or seller motivation to complete the trade.
Cap rate =
“Earnings”
Property’s Cash NOI
=
“Price”
Market value or price paid for a property
In theory, the cap rate should approximate a price at which the
assets of the REIT could be sold in the direct property markets.
Investors can estimate which cap rates to use for their NAV calculations by looking at the cap rates at which similar assets (or portfolios
of assets) have traded recently. Ultimately, however, cap rates are
Analyzing REITs
157
subjective. If a seller is motivated by some extenuating circumstance,
such as the inability to refinance debt on the property that may
be maturing, the seller may be willing to sell the asset below what
the fair market value would be without extenuating circumstances.
The lower the price, the higher the cap rate. The amount of money
one buyer is willing to pay for an asset may differ widely from
what another buyer would pay. Differences among buyers’ bids are
a function of multiple factors, including divergent views on the
economic outlook, or tenant relationships that one buyer possesses
that would enable him to lease the assets better/worse than other
potential buyers, or differing plans to redevelop the asset over time.
Step 5: Adjust Fair Market Value for Other Investments and Financing
The final step in calculating NAV is to adjust the fair market value
calculated in Step 4 to include values for assets that are not currently
generating NOI, and to subtract the REIT’s total debt and preferred
stock outstanding:
Adjust Fair Market Value for
Other Investments and Financing:
Fair market value of in-service properties
± Accounts receivable, cash, and other tangible
assets, net of current liabilities
+ Properties HFS, net of associated debt
+ Properties under development:
• 1st Approach: development shown at cost
• 2nd Approach: development shown at
110 percent of cost
+ Land for development at book value
+ Construction management business (5× net
income, annualized)
– Total debt
– Preferred stock, at liquidation value
Net asset value (NAV)
Shares and OP units outstanding at the end of Q
NAV per share
- vs. Closing current stock price
Premium (discount) to NAV per share
(E)
(F)
(G)
First
Approach
Second
Approach
$471,116
−15,000
$471,116
−15,000
2,500
2,500
100,000
(H)
(I)
25,000
4,000
110,000
25,000
4,000
( J)
( J)
−200,000
−75,000
$312,616
−200,000
−75,000
$322,616
25,000
$12.50
25,000
$12.90
$10.00
−20.0%
$10.00
−22.5%
(continued)
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The Intelligent REIT Investor
Explanations of the footnotes to Step 5’s are as follows:
E
Using information from the REIT’s balance sheet, add tangible assets not
accounted for as in-service properties, such as cash and restricted cash, accounts
receivable, and prepaid expenses. Tangible assets do not include deferred items,
such as deferred leasing and financing costs or deferred rent receivable.
F
Assets held for sale—Because the NOI from assets HFS was not included in the cash
NOI in the First Approach, and because the Second Approach deducted the cash
NOI from assets HFS as part of calculating the run rate NOI, the assets HFS are not
yet valued for NAV purposes. They will be listed on the balance sheet at book value,
and should be added.
G
If a REIT has properties under development, they most likely are not accounted for
in NOI. The industry values developments two ways. First, if the REIT’s disclosure
is adequate, investors can project the estimated cash flows from the development
projects and calculate their net present value. However, this calculation is complicated and usually not materially better than the more simplified method of adding
the costs incurred to-date for any development or redevelopment project, including
land being used in the development. If the developments appear to be low risk in
nature (e.g., they are pre-leased), a premium of 10 percent (or more) can be added.
H
Add land at book value (generally listed on the balance sheet or in a schedule in
the supplemental).
I
Value business services by adding their last four quarters of net income, and multiply the sum by five, which is the equivalent of applying a 20 percent cap rate. Such
services are viewed as being variable, so a high cap rate typically is appropriate.
J
Next, subtract all debt outstanding and the liquidation value of any preferred stock
or preferred units (preferred stock “issued” at the OP level).
This resulting sum is the REIT’s NAV. Divide the NAV by the sum
of the REIT’s total shares and OP units outstanding to calculate NAV
per share.
Implied Capitalization Rate
A REIT’s implied capitalization rate (implied cap rate) is analogous
to an unlevered internal rate of return (IRR) in that it is the unleveraged return an investor locks-in if he or she buys the REIT at the
current price. Since a cap rate is equal to the inverse of a company’s
earnings multiple, a REIT with a higher implied cap rate generally is
considered a better relative value than a comparable REIT trading at
a lower implied cap rate, especially if similar quality properties have
recently been sold in similar markets at lower cap rates.
A second way to apply implied cap rates in analyzing REITs is to
compare them to cap rates being paid for similar assets in the direct
Analyzing REITs
159
If a REIT’s implied cap rate > cap rates on similar assets for sale in
the direct property market, the REIT’s shares are an attractive value.
property markets. For example, if the implied cap rate of an industrial REIT is higher than cap rates on recent, comparable industrial
assets that recently traded owners, then buying the industrial REIT’s
shares is the better value.
To calculate the implied cap rate at which a REIT is trading, enter
the current stock price as the REIT’s NAV per share and solve for the
cap rate. Table 8.6 illustrates these steps, which are simply the reverse
of the major steps used to calculate NAV.
Table 8.6 Implied Cap Rate Calculation
Step 1:
REIT’s current share price
× shares and OP units outstanding
Implied net asset value
Step 2:
Step 3:
$250,000
Adjust for non-income-producing items & financing:
Implied net value of Rockland REIT (from above)
+ Preferred stock, at liquidation value
+ Total debt
− Construction management business
− Land for development at book value
− Properties under development
− Properties HFS, net of associated debt
± Accounts receivable, cash, and other tangible assets,
net of current liabilities
250,000
75,000
200,000
−4,000
−25,000
−100,000
−2,500
Implied fair market value
$408,500
15,000
Divide the annualized cash NOI calculated in Step #3 in
calculating NAV by the implied fair market value:∗
Annualized adjusted cash NOI
÷ Implied gross asset value
Implied Cap Rate
∗ Based
$10.00
25,000
on information presented in the First Approach in Step #3 of calculating NAV.
$30,623
$408,500
7.5%
Conclusion
M
any investors make the mistake of investing in a REIT
because they “like the buildings” or know someone who works there.
Although these two stock picking strategies can work out, they
usually do not. As discussed in Chapter 7, if a REIT has a superior
portfolio of properties, a conservatively leveraged balance sheet, and
a management team with a proven track record of allocating capital
prudently, it is likely to be a good investment, even if the price at
which you buy it is not “cheap” or deeply discounted at the time.
Most investors do not have the opportunity to assess management’s character directly. They also may not be skilled at gauging the
direction in which the U.S. economy is headed—although 24/7 news
stations make it easier to stay current. One thing every investor can
do is to understand the risks and rewards inherent in each of the different property types. As discussed in Chapters 4 and 5, the risks and
benefits of different property types are related to how short or long
a REIT’s leases are with tenants, as well as the durability of demand
for that property type in times of economic growth or contraction.
Longer leases generate steady, more predictable earnings,
whereas earnings from shorter leases can be more volatile. REIT
share prices and, by extension, P/FFO multiples (see Chapter 8)
reflect this fundamental difference in earnings volatility. Table C.1
indicates typical lease durations used by each property type and
ranks the sectors by their betas. According to Investopedia.com, beta
is a measure of a stock’s volatility in relation to the stock market,
where the stock market has a beta of 1.0. A “high-beta stock” is
one that exhibits price swings greater than the market over time
Investors who simply buy shares in a REIT “because they like the
buildings” may face frustration as REITs in other property types outperform their selection.
161
162
Conclusion
Table C.1
Lease Length and Stock Beta by Property Type
Property Sector
Hotel
Regional Mall
Industrial
Shopping Center
Office
Multi-Family
Self-Storage
Specialty
Other Retail (triple-net)
Health Care
Manufactured Home
Diversified
Grand Total
Typical
Lease Duration
N/A
3–7 years
3–7 years
3–7 years
3–7 years
1 year
Monthly
Varies by Company
10-plus years
10-plus years
Monthly
Varies by Company
Average of Beta
1 Year
3 Years
0.99
0.86
0.81
0.76
0.76
0.73
0.73
0.72
0.66
0.66
0.61
0.58
0.74
0.98
0.82
0.83
0.76
0.78
0.65
0.75
0.86
0.67
0.63
0.63
0.66
0.77
Source: S&P Global Market Intelligence.
and has a beta above 1.0. Conversely, stocks that trade with less
volatility than the market (“low-beta stocks”) have a beta that is
less than 1.0. Stocks with higher betas carry more risk, but can also
deliver greater returns. Hotel REITs, which have no leases, trade
with greater volatility than health-care REITs, which typically employ
long-term, triple-net leases. While some property types are higher
beta than others, every REIT sector shown in Table C.1 trades with
less volatility than the market. Investors should understand which
REITs are appropriate, given each investor’s risk tolerance.
Which REITs Are Right for Your Portfolio?
Understanding how REITs in different property sectors have traded
in the past is instructive for setting expectations as to how they may
perform in similar trading environments in the future. Table 7.2 in
Chapter 7 provides total returns by property sector from 1994–2015.
However, developing a sense of when to buy which REITs is complicated by the fact that real estate fundamentals lag the economy, but
REIT shares (as stocks) reflect future expectations.
Real estate fundamentals lag the general economy; by how much
depends on the type of property (office, warehouse, hotel, etc.), the
structure and average lease length in place in existing buildings, and
how balanced the demand for commercial space is with supply. There
is no hard, fast rule to determine when the time is right to buy or
Conclusion
163
Predicting REIT returns is more complicated than for other
industries. The difficulty arises from the fact that commercial property is a defensive, lagging indicator for the economy. However,
stock prices represent investors’ present value of future expected
earnings. As a result, REIT stock prices often do not reflect
what investors physically see as they go to work, shop, or enjoy
recreational activities.
sell which sectors. Each economic cycle is different with regard to
how long and how strong a recovery phase will last, or how long and
deep the trough of a recession will endure. There is an adage about
investing that still holds true:
The only people who can time the market are fools and liars.
The point being, there is not a best time to buy or sell any stocks,
including REITs. Applying the guidelines, data, and historical
information, as well as the analytical tools provided in this book, will
help investors choose REITs that are appropriate for their portfolios.
Reading the information that is available on company websites will
also yield a wealth of information that an investor and financial
advisors can use to decide if a REIT fits the investor’s risk tolerance
and return goals. Investors who do not like to see the prices of
their stocks gyrate wildly may want to avoid investing in hotel or
office REITs. If an investor is more interested in buying REITs for
the dividend income, he or she should focus on REITs that use
long-term triple-net leases, such as the freestanding retail REITs,
most health-care REITs, and many of the specialty REITs.
Whatever the case, individuals would be well served to discuss
the appropriateness of their investment with an informed financial
advisor—preferably one who has also read this book! Ultimately, the
most sound investment strategy for investing in REITs is to go for
quality: quality real estate, quality balance sheet, and quality management. Identifying REITs whose senior management teams have
successfully navigated their companies through at least one recession is a good screening technique (though there are many skilled
teams running newly formed REITs). Assess the strength of the balance sheet and the safety of the dividend using the simple equations
provided in Chapter 8, and read about the quality of their properties
164
Conclusion
in research reports and in the REIT’s public information. The Intelligent REIT Investor has given you the tools and guidelines you need
to choose the right REITs, and to avoid investing in the wrong ones.
So keep your copy handy and go enjoy the wealth-building power of
investing in real estate investment trusts.
Further Resources
The Intelligent REIT Investor can be used in several ways. Individuals
who simply want to have more informed discussions about REITs
with their financial advisors should focus on Chapters 1–5. Chapters
6–8 are more technical in nature and are geared for professional
money managers and analysts who may be investing other people’s
money in the sector. Financial advisors, depending on the quality
of REIT research they have access to within their firms, may want
to read every chapter, even if their firm employs a research team to
analyze REITs.
REIT.com is NAREIT’s website and contains news, articles,
and data on REITs and the industry. Investors can access nearly all
information for free, including the basics of REIT investment in real
estate, lists of REIT funds, detailed company-specific information,
and detailed industry research.
SPGlobal.com is the website for S&P Global Market Intelligence,
an organization that provides the information that’s essential for
companies, governments, and individuals to make decisions with
conviction. Previously known as SNL Financial, S&P Global Market
Intelligence has provided specialized data and news on the REIT
industry since 1994.
GreenStreetAdvisors.com is the website for Green Street
Advisors. Founded in 1985, Green Street Advisors is the preeminent independent research and advisory firm concentrating on
the commercial real estate industry in North America and Europe.
The company is a leading provider of real estate analytics, research,
and data on both the listed and private markets. Green Street
also offers investment research on REITs and trading services to
equity investors.
TheIntelligentREITInvestor.com is a reasonably priced, webbased research platform operated by Forbes and R. Brad Thomas.
Conclusion
165
Other books on REITs have been written that delve more deeply
into certain subject matter discussed in this book, including the
following:
• Watch that Rat Hole: And Witness the REIT Revolution, by
Kenneth D. Campbell, 2016
• Getting Started in Real Estate Investment Trusts by Richard Imperiale, 2006
• Investing in REITs: Real Estate Investment Trusts by Ralph L. Block
• The Complete Guide to Investing in REITS—Real Estate Investment
Trusts: How to Earn High Rates of Returns Safely by Mark Gordon
• REITs: Building Profits with Real Estate Investment Trusts by
John A. Mullaney, 1998
• Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities (Financial Management Association Survey
and Synthesis Series) by Su Han Chan, John Erickson, and
Ko Wang
A
A P P E N D I X
REITs Listed Alphabetically
by Company Name
Company Name
Acadia Realty Trust
AG Mortgage Investment Trust
Agree Realty Corporation
Alexander’s, Inc.
Alexandria Real Estate Equities
Altisource Residential
American Assets Trust, Inc.
American Campus Communities, Inc.
American Capital Agency Corp
American Capital Mortgage Investment
American Farmland Company
American Homes 4 Renta
American Residential Properties, Inc.a
American Tower Corp
Annaly Capital Management
Anworth Mortgage Asset
Apartment Investment and
Management Companyb
Apollo Commercial Real Estate Financec
Apollo Residential Mortgagec
Apple Hospitality REIT, Inc.
167
Ticker
Symbol
Type
AKR
MITT
ADC
ALX
ARE
RESI
AAT
ACC
AGNC
MTGE
AFCO
AMH
ARPI
AMT
NLY
ANH
AIV
Equity
Mortgage
Equity
Equity
Equity
Mortgage
Equity
Equity
Mortgage
Mortgage
Equity
Equity
Equity
Equity
Mortgage
Mortgage
Equity
ARI
AMTG
APLE
Mortgage
Mortgage
Equity
168
Appendix A: REITs Listed Alphabetically by Company Name
Company Name
Arbor Realty Trust
Ares Commercial Real Estate
Armada Hoffler Properties
ARMOUR Residential REIT
Ashford Hospitality Prime, Inc.
Ashford Hospitality Trust, Inc.
AvalonBay Communities, Inc.
BioMed Realty Trust, Inc.d
Blackstone Mortgage Trust
Bluerock Residential Growth REIT, Inc.
Boston Properties, Inc.
Brandywine Realty Trust
Brixmor Property Group, Inc.
BRT Realty Trust
Camden Property Trust
Campus Crest Communities, Inc.e
Capstead Mortgage
Care Capital Properties, Inc.
CareTrust REIT, Inc.
CatchMark Timber Trust, Inc.
CBL & Associates Properties, Inc.
Cedar Realty Trust, Inc.
Chatham Lodging Trust
Cherry Hill Mortgage Investment
Chesapeake Lodging Trust
Chimera Investment
City Office REIT, Inc.
Colony Capital
Colony Starwood Homes f
Columbia Property Trust, Inc.
Communications Sales & Leasing
Community Healthcare Trust
Incorporated
Ticker
Symbol
Type
ABR
ACRE
AHH
ARR
AHP
AHT
AVB
BMR
BXMT
BRG
BXP
BDN
BRX
BRT
CPT
CCG
CMO
CCP
CTRE
CTT
CBL
CDR
CLDT
CHMI
CHSP
CIM
CIO
CLNY
SFR
CXP
CSAL
CHCT
Mortgage
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Equity
Appendix A: REITs Listed Alphabetically by Company Name
169
Company Name
Ticker
Symbol
Type
Condor Hospitality Trust, Inc.
CorEnergy Infrastructure Trust
CoreSite Realty Corporation
Corporate Office Properties Trustg
Corrections Corporation of America
Cousins Properties Incorporatedh
Crown Castle International Corp
CubeSmart
CyrusOne, Inc.
CYS Investments
DCT Industrial Trust, Inc.
DDR Corp.
DiamondRock Hospitality Company
Digital Realty Trust, Inc.
Douglas Emmett, Inc.
Duke Realty Corporation
DuPont Fabros Technology, Inc.
Dynex Capital
Easterly Government Properties, Inc.
EastGroup Properties, Inc.
Education Realty Trust, Inc.
Ellington Residential Mortgage REIT
Empire State Realty Trust, Inc.
EPR Properties
Equinix
Equity Commonwealth
Equity LifeStyle Properties, Inc.
Equity One, Inc.
Equity Residential
Essex Property Trust, Inc.
Extra Space Storage, Inc.
Farmland Partners, Inc.
Federal Realty Investment Trust
FelCor Lodging Trust Incorporated
CDOR
CORR
COR
OFC
CXW
CUZ
CCI
CUBE
CONE
CYS
DCT
DDR
DRH
DLR
DEI
DRE
DFT
DX
DEA
EGP
EDR
EARN
ESRT
EPR
EQIX
EQC
ELS
EQY
EQR
ESS
EXR
FPI
FRT
FCH
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
170
Appendix A: REITs Listed Alphabetically by Company Name
Company Name
First Industrial Realty Trust, Inc.
First Potomac Realty Trust
Five Oaks Investment Corp
Franklin Street Properties Corporation
Gaming and Leisure Properties, Inc.
General Growth Properties, Inc.
GEO Group, Inc.
Getty Realty Corp.
Gladstone Commercial Corp
Gladstone Land Corporation
Global Net Lease
Government Properties Income Trust
Gramercy Property Trust, Inc.i
Great Ajax
Hannon Armstrong Sustainable
Infrastructure
Hatteras Financial
HCP, Inc.
Healthcare Realty Trust Incorporated
Healthcare Trust of America, Inc.
Hersha Hospitality Trust
Highwoods Properties, Inc.
HMG/Courtland Properties
Hospitality Properties Trust
Host Hotels & Resorts, Inc.
Hudson Pacific Properties, Inc.
Independence Realty Trust, Inc
InfraREIT, Inc.
Inland Real Estate Corporation j
InnSuites Hospitality Trust
Invesco Mortgage Capital
Investors Real Estate Trust
Iron Mountain Incorporated
iStar, Inc.
Ticker
Symbol
Type
FR
FPO
OAKS
FSP
GLPI
GGP
GEO
GTY
GOOD
LAND
GNL
GOV
GPT
AJX
HASI
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Mortgage
HTS
HCP
HR
HTA
HT
HIW
HMG
HPT
HST
HPP
IRT
HIFR
IRC
IHT
IVR
IRET
IRM
STAR
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Mortgage
Appendix A: REITs Listed Alphabetically by Company Name
Company Name
JAVELIN Mortgage Investment†
Jernigan Capital
Kilroy Realty Corporation
Kimco Realty Corporation
Kite Realty Group Trust
Ladder Capital Corpk
Lamar Advertising
LaSalle Hotel Properties
Lexington Realty Trust
Liberty Property Trust
LTC Properties, Inc.
Macerich Company
Mack-Cali Realty Corporation
Medical Properties Trust, Inc.
MFA Financial
Mid-America Apartment Communities,
Inc.l
Monmouth Real Estate Investment
Corporation
Monogram Residential Trust, Inc.
National Health Investors, Inc.
National Retail Properties, Inc.
National Storage Affiliates Trust
New Residential Investment Corp
New Senior Investment Group, Inc.
New York Mortgage Trust
New York REIT, Inc.
Newcastle Invt Corp
NexPoint Residential Trust, Inc.
NorthStar Realty Europe
NorthStar Realty Finance
Omega Healthcare Investors, Inc.
One Liberty Properties
Orchid Island Capital
Outfront Media
171
Ticker
Symbol
Type
JMI
JCAP
KRC
KIM
KRG
LADR
LAMR
LHO
LXP
LPT
LTC
MAC
CLI
MPW
MFA
MAA
Mortgage
Mortgage
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
MNR
Equity
MORE
NHI
NNN
NSA
NRZ
SNR
NYMT
NYRT
NCT
NXRT
NRE
NRF
OHI
OLP
ORC
OUT
Equity
Equity
Equity
Equity
Mortgage
Equity
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
172
Appendix A: REITs Listed Alphabetically by Company Name
Company Name
Ticker
Symbol
Type
Owens Realty Mortgage, Inc.
Paramount Group, Inc.
Parkway Properties, Inc.h
Pebblebrook Hotel Trust
Pennsylvania REIT
PennyMac Mortgage Investment Trust
Physicians Realty Trust
Piedmont Office Realty Trust, Inc.
Plum Creek Timber Company, Inc.m
Post Properties, Inc.
Potlatch Corporation
Power REIT
Preferred Apartment Communities, Inc.
Prologis, Inc.
PS Business Parks, Inc.
Public Storage
QTS Realty Trust, Inc.
RAIT Financial Trust
Ramco-Gershenson Properties Trust
Rayonier, Inc.
Realty Income Corporation
Redwood Trust
Regency Centers Corporation
Resource Capital
Retail Opportunity Investments Corp.
Retail Properties of America, Inc.
Rexford Industrial Realty, Inc.
RLJ Lodging Trust
Rouse Properties, Inc.†
Ryman Hospitality Properties, Inc.
Sabra Health Care REIT, Inc.
Saul Centers, Inc.
Select Income REIT
Senior Housing Properties Trust
ORM
PGRE
PKY
PEB
PEI
PMT
DOC
PDM
PCL
PPS
PCH
PW
APTS
PLD
PSB
PSA
QTS
RAS
RPT
RYN
O
RWT
REG
RSO
ROIC
RPAI
REXR
RLJ
RSE
RHP
SBRA
BFS
SIR
SNH
Mortgage
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Appendix A: REITs Listed Alphabetically by Company Name
Company Name
Seritage Growth Properties
Silver Bay Realty Trust Corp.
Simon Property Group, Inc.
SL Green Realty Corp.
SoTHERLY Hotels, Inc.
Sovran Self Storage, Inc.
Spirit Realty Capital, Inc.
STAG Industrial, Inc.
Starwood Property Trust, Inc.
STORE Capital Corporation
Summit Hotel Properties, Inc.
Sun Communities, Inc.
Sunstone Hotel Investors, Inc.
Tanger Factory Outlet Centers, Inc.
Taubman Centers, Inc.
Terreno Realty Corporation
TIER REIT, Inc.
Two Harbors Investment
UDR, Inc.
UMH Properties, Inc.
Universal Health Realty Income Trust
Urban Edge Properties
Urstadt Biddle Properties, Inc.
Ventas, Inc.
VEREIT, Inc.n
Vornado Realty Trust
W. P. Carey, Inc.
Washington REIT
Weingarten Realty Investors
Welltower, Inc.
Western Asset Mortgage Capital
Weyerhaeuser Company
Wheeler Real Estate Investment Trust,
Inc.
173
Ticker
Symbol
Type
SRG
SBY
SPG
SLG
SOHO
SSS
SRC
STAG
STWD
STOR
INN
SUI
SHO
SKT
TCO
TRNO
TIER
TWO
UDR
UMH
UHT
UE
UBA
VTR
VER
VNO
WPC
WRE
WRI
HCN
WMC
WY
WHLR
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
174
Appendix A: REITs Listed Alphabetically by Company Name
Company Name
Ticker
Symbol
Type
Whitestone REIT
Winthrop Realty Trust
WP Glimcher, Inc.
Xenia Hotels & Resorts, Inc.
ZAIS Financial Corp
WSR
FUR
WPG
XHR
ZFC
Equity
Equity
Equity
Equity
Mortgage
†
This REIT is in the process of being acquired and is not likely to remain public.
In February 2016, American Homes 4 Rent merged with American Residential
Properties, Inc. (former NYSE: ARPI).
b
This company is often referred to as “Aimco.”
c
AMTG agreed to be acquired by ARI in February 2016.
d
In January 2016, BioMed Realty Trust (former NYSE: BMR) was taken private.
e
In January 2016, Campus Crest Communities (former NYSE: CCG) was taken
private.
f
In January 2016, Starwood Waypoint Residential Trust (former NYSE: SWAY)
merged with Colony American Homes.
g
This company is often referred to as “COPT.”
h
In April 2016, Parkway Properties and Cousins Properties announced they will
merge; the transaction is expected to be complete before the end of 2016.
i
In December 2015, Gramercy acquired Chambers Street Properties (former NYSE:
CSG).
j
In 2016, Inland Real Estate (former NYSE: IRC) was taken private.
k
LADR was not included in the FTSE NAREIT All REITs Index at December 31,
2015, but was added in 2016.
l
This company is often referred to as “MAA.”
m
Plum Creek Timber was acquired by Weyerhauser in February 2016.
n
Former name: American Realty Capital Properties (NYSE: ARCP).
a
B
A P P E N D I X
REITs Listed Alphabetically
by Ticker Symbol
Symbol
Company Name
Type
AAT
ABR
ACC
ACRE
ADC
AFCO
AGNC
AHH
AHP
AHT
AIV
American Assets Trust, Inc.
Arbor Realty Trust
American Campus Communities, Inc.
Ares Commercial Real Estate
Agree Realty Corporation
American Farmland Company
American Capital Agency Corp
Armada Hoffler Properties
Ashford Hospitality Prime, Inc.
Ashford Hospitality Trust, Inc.
Apartment Investment and
Management Companya
Great Ajax
Acadia Realty Trust
Alexander’s, Inc.
American Homes 4 Rentb
American Tower Corp
Apollo Residential Mortgagec
Anworth Mortgage Asset
Apple Hospitality REIT, Inc.
Preferred Apartment Communities, Inc.
Alexandria Real Estate Equities
Apollo Commercial Real Estate Financec
Equity
Mortgage
Equity
Mortgage
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
AJX
AKR
ALX
AMH
AMT
AMTG
ANH
APLE
APTS
ARE
ARI
175
Mortgage
Equity
Equity
Equity
Equity
Mortgage
Mortgage
Equity
Equity
Equity
Mortgage
176
Appendix B: REITs Listed Alphabetically by Ticker Symbol
Symbol
Company Name
Type
ARPI
ARR
AVB
BDN
BFS
BMR
BRG
BRT
BRX
BXMT
BXP
CBL
CCG
CCI
CCP
CDOR
CDR
CHCT
American Residential Properties, Inc.b
ARMOUR Residential REIT
AvalonBay Communities, Inc.
Brandywine Realty Trust
Saul Centers, Inc.
BioMed Realty Trust, Inc.d
Bluerock Residential Growth REIT, Inc.
BRT Realty Trust
Brixmor Property Group, Inc.
Blackstone Mortgage Trust
Boston Properties, Inc.
CBL & Associates Properties, Inc.
Campus Crest Communities, Inc.e
Crown Castle International Corp
Care Capital Properties, Inc.
Condor Hospitality Trust, Inc.
Cedar Realty Trust, Inc.
Community Healthcare Trust
Incorporated
Cherry Hill Mortgage Investment
Chesapeake Lodging Trust
Chimera Investment
City Office REIT, Inc.
Chatham Lodging Trust
Mack-Cali Realty Corporation
Colony Capital
Capstead Mortgage
CyrusOne, Inc.
CoreSite Realty Corporation
CorEnergy Infrastructure Trust
Camden Property Trust
Communications Sales & Leasing
CareTrust REIT, Inc.
CatchMark Timber Trust, Inc.
CubeSmart
Cousins Properties Incorporated f
Columbia Property Trust, Inc.
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
CHMI
CHSP
CIM
CIO
CLDT
CLI
CLNY
CMO
CONE
COR
CORR
CPT
CSAL
CTRE
CTT
CUBE
CUZ
CXP
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Mortgage
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Appendix B: REITs Listed Alphabetically by Ticker Symbol
177
Symbol
Company Name
Type
CXW
CYS
DCT
DDR
DEA
DEI
DFT
DLR
DOC
DRE
DRH
DX
EARN
EDR
EGP
ELS
EPR
EQC
EQIX
EQR
EQY
ESRT
ESS
EXR
FCH
FPI
FPO
FR
FRT
FSP
FUR
GEO
GGP
GLPI
GNL
GOOD
GOV
Corrections Corporation of America
CYS Investments
DCT Industrial Trust, Inc.
DDR Corp.
Easterly Government Properties, Inc.
Douglas Emmett, Inc.
DuPont Fabros Technology, Inc.
Digital Realty Trust, Inc.
Physicians Realty Trust
Duke Realty Corporation
DiamondRock Hospitality Company
Dynex Capital
Ellington Residential Mortgage REIT
Education Realty Trust, Inc.
EastGroup Properties, Inc.
Equity LifeStyle Properties, Inc.
EPR Properties
Equity Commonwealth
Equinix
Equity Residential
Equity One, Inc.
Empire State Realty Trust, Inc.
Essex Property Trust, Inc.
Extra Space Storage, Inc.
FelCor Lodging Trust Incorporated
Farmland Partners, Inc.
First Potomac Realty Trust
First Industrial Realty Trust, Inc.
Federal Realty Investment Trust
Franklin Street Properties Corporation
Winthrop Realty Trust
GEO Group, Inc.
General Growth Properties, Inc.
Gaming and Leisure Properties, Inc.
Global Net Lease
Gladstone Commercial Corp
Government Properties Income Trust
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
178
Appendix B: REITs Listed Alphabetically by Ticker Symbol
Symbol
Company Name
Type
GPT
GTY
HASI
Gramercy Property Trust, Inc.g
Getty Realty Corp.
Hannon Armstrong Sustainable
Infrastructure
Welltower, Inc.
HCP, Inc.
InfraREIT, Inc.
Highwoods Properties, Inc.
HMG/Courtland Properties
Hudson Pacific Properties, Inc.
Hospitality Properties Trust
Healthcare Realty Trust Incorporated
Host Hotels & Resorts, Inc.
Hersha Hospitality Trust
Healthcare Trust of America, Inc.
Hatteras Financial
InnSuites Hospitality Trust
Summit Hotel Properties, Inc.
Inland Real Estate Corporationh
Investors Real Estate Trust
Iron Mountain Incorporated
Independence Realty Trust, Inc.
Invesco Mortgage Capital
Jernigan Capital
JAVELIN Mortgage Investment†
Kimco Realty Corporation
Kilroy Realty Corporation
Kite Realty Group Trust
Ladder Capital Corpi
Lamar Advertising
Gladstone Land Corporation
LaSalle Hotel Properties
Liberty Property Trust
LTC Properties, Inc.
Lexington Realty Trust
Mid-America Apartment Communities,
Inc. j
Macerich Company
Equity
Equity
Mortgage
HCN
HCP
HIFR
HIW
HMG
HPP
HPT
HR
HST
HT
HTA
HTS
IHT
INN
IRC
IRET
IRM
IRT
IVR
JCAP
JMI
KIM
KRC
KRG
LADR
LAMR
LAND
LHO
LPT
LTC
LXP
MAA
MAC
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Mortgage
Mortgage
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Appendix B: REITs Listed Alphabetically by Ticker Symbol
179
Symbol
Company Name
Type
MFA
MITT
MNR
MFA Financial
AG Mortgage Investment Trust
Monmouth Real Estate Investment
Corporation
Monogram Residential Trust, Inc.
Medical Properties Trust, Inc.
American Capital Mortgage Investment
Newcastle Invt Corp
National Health Investors, Inc.
Annaly Capital Management
National Retail Properties, Inc.
NorthStar Realty Europe
NorthStar Realty Finance
New Residential Investment Corp
National Storage Affiliates Trust
NexPoint Residential Trust, Inc.
New York Mortgage Trust
New York REIT, Inc.
Realty Income Corporation
Five Oaks Investment Corp
Corporate Office Properties Trustk
Omega Healthcare Investors, Inc.
One Liberty Properties
Orchid Island Capital
Owens Realty Mortgage, Inc.
Outfront Media
Potlatch Corporation
Plum Creek Timber Company, Inc.l
Piedmont Office Realty Trust, Inc.
Pebblebrook Hotel Trust
Pennsylvania REIT
Paramount Group, Inc.
Parkway Properties, Inc. f
Prologis, Inc.
PennyMac Mortgage Investment Trust
Post Properties, Inc.
Public Storage
PS Business Parks, Inc.
Mortgage
Mortgage
Equity
MORE
MPW
MTGE
NCT
NHI
NLY
NNN
NRE
NRF
NRZ
NSA
NXRT
NYMT
NYRT
O
OAKS
OFC
OHI
OLP
ORC
ORM
OUT
PCH
PCL
PDM
PEB
PEI
PGRE
PKY
PLD
PMT
PPS
PSA
PSB
Equity
Equity
Mortgage
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Mortgage
Equity
Equity
Mortgage
Equity
Equity
Mortgage
Equity
Equity
Equity
Mortgage
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Equity
Equity
180
Appendix B: REITs Listed Alphabetically by Ticker Symbol
Symbol
Company Name
Type
PW
QTS
RAS
REG
RESI
REXR
RHP
RLJ
ROIC
RPAI
RPT
RSE
RSO
RWT
RYN
SBRA
SBY
SFR
SHO
SIR
SKT
SLG
SNH
SNR
SOHO
SPG
SRC
SRG
SSS
STAG
STAR
STOR
STWD
SUI
TCO
TIER
TRNO
Power REIT
QTS Realty Trust, Inc.
RAIT Financial Trust
Regency Centers Corporation
Altisource Residential
Rexford Industrial Realty, Inc.
Ryman Hospitality Properties, Inc.
RLJ Lodging Trust
Retail Opportunity Investments Corp.
Retail Properties of America, Inc.
Ramco-Gershenson Properties Trust
Rouse Properties, Inc.†
Resource Capital
Redwood Trust
Rayonier, Inc.
Sabra Health Care REIT, Inc.
Silver Bay Realty Trust Corp.
Colony Starwood Homesm
Sunstone Hotel Investors, Inc.
Select Income REIT
Tanger Factory Outlet Centers, Inc.
SL Green Realty Corp.
Senior Housing Properties Trust
New Senior Investment Group, Inc.
SoTHERLY Hotels, Inc.
Simon Property Group, Inc.
Spirit Realty Capital, Inc.
Seritage Growth Properties
Sovran Self Storage, Inc.
STAG Industrial, Inc.
iStar Inc
STORE Capital Corporation
Starwood Property Trust, Inc.
Sun Communities, Inc.
Taubman Centers, Inc.
TIER REIT, Inc.
Terreno Realty Corporation
Equity
Equity
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
Equity
Mortgage
Equity
Equity
Equity
Equity
Appendix B: REITs Listed Alphabetically by Ticker Symbol
181
Symbol
Company Name
Type
TWO
UBA
UDR
UE
UHT
UMH
VER
VNO
VTR
WHLR
Two Harbors Investment
Urstadt Biddle Properties, Inc.
UDR, Inc.
Urban Edge Properties
Universal Health Realty Income Trust
UMH Properties, Inc.
VEREIT, Inc.n
Vornado Realty Trust
Ventas, Inc.
Wheeler Real Estate Investment Trust,
Inc.
Western Asset Mortgage Capital
W. P. Carey, Inc.
WP Glimcher, Inc.
Washington REIT
Weingarten Realty Investors
Whitestone REIT
Weyerhaeuser Company
Xenia Hotels & Resorts, Inc.
ZAIS Financial Corp
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
WMC
WPC
WPG
WRE
WRI
WSR
WY
XHR
ZFC
†
Mortgage
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Mortgage
This REIT is in the process of being acquired and is not likely to remain public.
This company is often referred to as “Aimco. ”
b
In February 2016, American Homes 4 Rent merged with American Residential
Properties, Inc. (former NYSE: ARPI).
c
AMTG agreed to be acquired by ARI in February 2016.
d
In January 2016, BioMed Realty Trust (former NYSE: BMR) was taken private.
e
In January 2016, Campus Crest Communities (former NYSE: CCG) was taken
private.
f
In April 2016, Parkway Properties and Cousins Properties announced they will
merge; the transaction is expected to be complete before the end of 2016.
g
In December 2015, Gramercy acquired Chambers Street Properties (former NYSE:
CSG).
h
In 2016, Inland Real Estate (former NYSE: IRC) was taken private.
i
LADR was not included in the FTSE NAREIT All REITs Index at December 31, 2015,
but was added in 2016.
j
This company is often referred to as “MAA. ”
k
This company is often referred to as “COPT. ”
l
Plum Creek Timber was acquired by Weyerhauser in February 2016.
m
In January 2016, Starwood Waypoint Residential Trust (former NYSE: SWAY)
merged with Colony American Homes.
n
Former name: American Realty Capital Properties (NYSE: ARCP).
a
C
A P P E N D I X
REITs by Sector
Table C.1
Diversified REITs
Company Name
Alexander’s, Inc.
American Assets Trust
Armada Hoffler
Properties
BRT Realty Trust
Gladstone Commercial
Corp
Global Net Lease
HMG/Courtland
Properties
Investors Real Estate
Trust
Lexington Realty Trust
NorthStar Realty
Finance
One Liberty Properties
VEREIT, Inc.a
Vornado Realty Trust
W. P. Carey Inc.
Washington REIT
Whitestone REIT
Winthrop Realty Trust
Ticker
Headquarters
Symbol City
State Website Address
ALX
AAT
AHH
Paramus
San Diego
Virginia Beach
NJ
CA
VA
www.alx-inc.com
www.americanassetstrust.com
www.armadahoffler.com
BRT
GOOD
Great Neck
McLean
NY
VA
GNL
HMG
New York
NY
Coconut Grove FL
www.brtrealty.com
www.GladstoneCommercial
.com
www.globalnetlease.com
www.hmgcourtland.com
IRET
Minot
ND
www.iret.com
LXP
NRF
New York
New York
NY
NY
www.lxp.com
www.nrfc.com
OLP
VER
VNO
WPC
WRE
WSR
FUR
Great Neck
Phoenix
New York
New York
Washington
Houston
Boston
NY
AZ
NY
NY
DC
TX
MA
www.onelibertyproperties.com
www.vereit.com
www.vno.com
www.wpcarey.com
www.washreit.com
www.whitestonereit.com
www.winthropreit.com
a
Former name: American Realty Capital Properties (NYSE: ARCP)
Source: NAREIT, S&P Global Market Intelligence.
182
Appendix C: REITs by Sector
183
Table C.2 Specialty REITs
REIT
Ticker Subproperty
Symbol Type
Headquarters
City
State Website Address
American Farmland
Company
Corrections
Corporation of
America
EPR Properties
AFCO
Land
New York
NY
CXW
Prison
Nashville
TN
www.americanfarmland
company.com
www.cca.com
EPR
Kansas City
MO
www.eprkc.com
Farmland Partners
Inc.
Gaming and Leisure
Properties, Inc.
GEO Group, Inc.
Gladstone Land
Corporation
Iron Mountain, Inc.
Lamar Advertising
Outfront Media
FPI
Cineplex
Theater
Land
Denver
CO
GLPI
Casino
Wyomissing PA
www.farmlandpartners
.com
www.glpropinc.com
GEO
LAND
Prison
Land
Boca Raton
McLean
IRM
LAMR
OUT
Data Center
Billboards
Billboards
Boston
MA
Baton Rouge LA
New York
NY
Company Name
FL
VA
www.geogroup.com
www.gladstoneland
.com
www.ironmountain.com
www.lamar.com
www.outfrontmediab
.com
Source: NAREIT, S&P Global Market Intelligence.
Table C.3 Data Center REITs
Company Name
CoreSite Realty Corp
CyrusOne, Inc.
Digital Realty Trust, Inc.
DuPont Fabros
Technology, Inc.
Equinix
QTS Realty Trust, Inc.
Headquarters
Ticker
Symbol
City
State
Website Address
COR
CONE
DLR
DFT
Denver
Carrollton
San Francisco
Washington
CO
TX
CA
DC
www.CoreSite.com
www.cyrusone.com
www.digitalrealty.com
www.dft.com
EQIX
QTS
Redwood City
Overland Park
CA
KS
www.equinix.com
www.qtsdatacenters.com
Source: NAREIT, S&P Global Market Intelligence.
184
Appendix C: REITs by Sector
Table C.4
Infrastructure REITs
Company Name
American Tower Corp
Communications Sales
& Leasing
CorEnergy
Infrastructure Trust
Crown Castle
International Corp
InfraREIT, Inc.
Power REIT
Headquarters
Ticker
Symbol
City
State
Website Address
AMT
CSAL
Boston
Little Rock
MA
AR
www.americantower.com
www.cslreit.com
CORR
Kansas City
MO
CCI
Houston
TX
www.corenergy.corridortrust
.com
www.crowncastle.com
HIFR
PW
Dallas
Old Bethpage
TX
NY
www.infrareitinc.com
www.pwreit.com
Source: NAREIT, S&P Global Market Intelligence.
Table C.5
Timber REITs
Company Name
CatchMark Timber
Trust, Inc.
Plum Creek Timber
Company, Inc.a
Potlatch Corporation
Rayonier, Inc.
Weyerhaeuser Co.
Headquarters
Ticker
Symbol
City
State
Website Address
CTT
Atlanta
GA
www.catchmark.com
PCL
--
--
N/A
PCH
RYN
WY
Spokane
Jacksonville
Federal Way
WA
FL
WA
www.potlatchcorp.com
www.rayonier.com
www.weyerhaeuser.com
a Plum
Creek Timber was acquired by Weyerhauser in February 2016.
Source: NAREIT, S&P Global Market Intelligence.
Table C.6
Health-Care REITs
Company Name
Care Capital
Properties, Inc.
CareTrust REIT, Inc.
Community Healthcare
Trust Incorporated
HCP, Inc.
Healthcare Realty Trust
Incorporated
Healthcare Trust of
America, Inc.
LTC Properties, Inc.
Headquarters
Ticker
Symbol
City
State
Website Address
CCP
Chicago
IL
CTRE
CHCT
San Clemente
Franklin
CA
TN
HCP
HR
Irvine
Nashville
CA
TN
www.carecapitalproperties
.com
www.caretrustreit.com
www.communityhealthcare
trust.com
www.hcpi.com
www.healthcarerealty.com
HTA
Scottsdale
AZ
www.htareit.com
LTC
Westlake Village
CA
www.ltcreit.com
Appendix C: REITs by Sector
185
Table C.6 Health Care REITs (continued)
Company Name
Medical Properties
Trust, Inc.
National Health
Investors, Inc.
New Senior Investment
Group, Inc.
Omega Healthcare
Investors, Inc.
Physicians Realty Trust
Sabra Health Care REIT
Senior Housing
Properties Trust
Universal Health Realty
Income Trust
Ventas, Inc.
Welltower, Inc.
Headquarters
Ticker
Symbol
City
State
Website Address
MPW
Birmingham
AL
NHI
Murfreesboro
TN
www.medicalpropertiestrust
.com
www.nhireit.com
SNR
New York
NY
www.newseniorinv.com
OHI
Hunt Valley
MD
www.omegahealthcare.com
DOC
SBRA
SNH
Milwaukee
Irvine
Newton
WI
CA
MA
www.docreit.com
www.sabrahealth.com
www.snhreit.com
UHT
King of Prussia
PA
www.uhrit.com
VTR
HCN
Chicago
Toledo
IL
OH
www.ventasreit.com
www.welltower.com
Source: NAREIT, S&P Global Market Intelligence.
Table C.7 Industrial REITs
Company Name
DCT Industrial Trust,
Inc.
Duke Realty Corp
EastGroup Properties
First Industrial Realty
Trust, Inc.
Liberty Property Trust
Monmouth Real Estate
Investment Corp
Prologis, Inc.
PS Business Parks, Inc.
Rexford Industrial
Realty, Inc.
STAG Industrial, Inc.
Terreno Realty Corp
Headquarters
Ticker
Symbol
City
State
Website Address
DCT
Denver
CO
www.dctindustrial.com
DRE
EGP
FR
Indianapolis
Jackson
Chicago
IN
MS
IL
www.dukerealty.com
www.eastgroup.net
www.firstindustrial.com
LPT
MNR
Malvern
Freehold
PA
NJ
www.libertyproperty.com
www.mreic.com
PLD
PSB
REXR
San Francisco
Glendale
Los Angeles
CA
CA
CA
www.prologis.com
www.psbusinessparks.com
www.rexfordindustrial.com
STAG
TRNO
Boston
San Francisco
MA
CA
www.stagindustrial.com
www.terreno.com
Source: NAREIT, S&P Global Market Intelligence.
186
Appendix C: REITs by Sector
Table C.8
Lodging/Resorts REITs
Company Name
Headquarters
Ticker
Symbol City
State Website Address
Apple Hospitality REIT,
Inc.
Ashford Hospitality
Prime, Inc.
Ashford Hospitality
Trust, Inc.
Chatham Lodging Trust
APLE
Richmond
VA
AHP
Dallas
TX
www.applehospitalityreit
.com
www.ahpreit.com
AHT
Dallas
TX
www.ahtreit.com
CLDT
West Palm Beach FL
Chesapeake Lodging
Trust
Condor Hospitality
Trust, Inc.
DiamondRock
Hospitality Company
FelCor Lodging Trust
Hersha Hospitality Trust
Hospitality Properties
Trust
Host Hotels & Resorts
InnSuites Hospitality
Trust
LaSalle Hotel
Properties
Pebblebrook Hotel
Trust
RLJ Lodging Trust
Ryman Hospitality
Properties, Inc.
SoTHERLY Hotels Inc.
Summit Hotel
Properties, Inc.
Sunstone Hotel
Investors, Inc.
Xenia Hotels & Resorts
CHSP
Annapolis
MD
CDOR
Norfolk
NE
www.chathamlodgingtrust
.com
www.chesapeakelodging
trust.com
www.condorhospitality.com
DRH
Bethesda
MD
www.drhc.com
FCH
HT
HPT
Irving
Philadelphia
Newton
TX
PA
MA
www.felcor.com
www.hersha.com
www.hptreit.com
HST
IHT
Bethesda
Phoenix
MD
AZ
www.hosthotels.com
www.innsuitestrust.com
LHO
Bethesda
MD
www.lasallehotels.com
PEB
Bethesda
MD
RLJ
RHP
Bethesda
Nashville
MD
TN
www.pebblebrookhotels
.com
www.rljlodgingtrust.com
www.rymanhp.com
SOHO
INN
Williamsburg
Austin
VA
TX
www.sotherlyhotels.com
www.shpreit.com
SHO
Aliso Viejo
CA
www.sunstonehotels.com
XHR
Orlando
FL
www.xeniareit.com
Source: NAREIT, S&P Global Market Intelligence.
Appendix C: REITs by Sector
187
Table C.9 Mortgage REITs
Headquarters
Ticker
Symbol
City
State
Website Address
AG Mortgage Investment
Trust
Altisource Residential
American Capital Agency
Corp
American Capital
Mortgage Investment
Annaly Capital
Management
Anworth Mortgage Asset
Apollo Residential
Mortgagea
ARMOUR Residential REIT
Capstead Mortgage
Cherry Hill Mortgage
Investment
Chimera Investment
CYS Investments
Dynex Capital
Ellington Residential
Mortgage REIT
Five Oaks Investment Corp
MITT
New York
NY
www.agmit.com
RESI
AGNC
Chrisriansted
Bethesda
VI
MD
www.altisourceresi.com
www.agnc.com
MTGE
Bethesda
MD
www.mtge.com
NLY
New York
NY
www.annaly.com
ANH
AMTG
Santa Monica
New York
CA
NY
ARR
CMO
CHMI
Vero Beach
Dallas
Moorestown
FL
TX
NJ
www.anworth.com
www.apolloresidential
mortgage.com
www.armourreit.com
www.capstead.com
www.chmireit.com
CIM
CYS
DX
EARN
New York
Waltham
Glen Allen
Old Greenwich
NY
MA
VA
CT
www.chimerareit.com
www.cysinv.com
www.dynexcapital.com
www.earnreit.com
OAKS
New York
NY
Great Ajax
Hatteras Financial
Invesco Mortgage Capital
AJX
HTS
IVR
Beaverton
Winston-Salem
Atlanta
OR
NC
GA
JAVELIN Mortgage
Investment †
MFA Financial
New Residential
Investment Corp
New York Mortgage Trust
Orchid Island Capital
JMI
Vero Beach
FL
www.fiveoaksinvestment
.com
www.great-ajax.com
www.hatfin.com
www.invescomortgage
capital.com
www.javelinreit.com
MFA
NRZ
New York
New York
NY
NY
www.mfafinancial.com
www.newresi.com
NYMT
ORC
New York
Vero Beach
NY
FL
PennyMac Mortgage
Investment Trust
Redwood Trust
Two Harbors Investment
PMT
Moorpark
CA
RWT
TWO
Mill Valley
New York
CA
NY
Western Asset Mortgage
Capital
ZAIS Financial Corp
WMC
Pasadena
CA
ZFC
Red Bank
NJ
www.nymtrust.com
www.orchidislandcapital
.com
www.pennymacmortgage
investmenttrust.com
www.redwoodtrust.com
twoharborsinvestment
.com
www.westernassetmcc
.com
www.zaisfinancial.com
Company Name
Home Financing mREITs:
188
Appendix C: REITs by Sector
Table C.9
(continued)
Ticker
Symbol
Company Name
Headquarters
City
State
Website Address
ARI
New York
NY
www.apolloreit.com
ABR
ACRE
Uniondale
New York
NY
NY
www.arborrealtytrust.com
www.arescre.com
BXMT
New York
NY
CLNY
HASI
Los Angeles
Annapolis
CA
MD
www.blackstonemortgage
trust.com
www.colonyinc.com
www.hannonarmstrong
.com
STAR
JCAP
LADR
NCT
ORM
New York
Memphis
New York
New York
Walnut Creek
NY
TN
NY
NY
CA
www.istar.com
www.jernigancapital.com
www.laddercapital.com
www.newcastleinv.com
www.owensmortgage.com
RAS
RSO
Philadelphia
New York
PA
NY
STWD
Greenwich
CT
www.rait.com
www.resourcecapitalcorp
.com
www.starwoodproperty
trust.com
Commercial Financing mREITs:
Apollo Commercial Real
Estate Financea
Arbor Realty Trust
Ares Commercial Real
Estate
Blackstone Mortgage Trust
Colony Capital
Hannon Armstrong
Sustainable
Infrastructure
iStar, Inc.
Jernigan Capital
Ladder Capital Corp b
Newcastle Invt Corp
Owens Realty Mortgage
Inc
RAIT Financial Trust
Resource Capital
Starwood Property Trust,
Inc.
a AMTG
agreed to be acquired by ARI on February 26, 2016.
LADR was not included in the FTSE NAREIT All REITs Index at 12/31/2015, but was added in 2016.
† This company was in the process of being acquired and may no longer be public.
Source: NAREIT, S&P Global Market Intelligence.
b
Table C.10
Office REITs
Company Name
Alexandria Real Estate
Equities
BioMed Realty Trusta
Boston Properties, Inc.
Brandywine Realty Trust
City Office REIT, Inc.
Columbia Property
Trust, Inc.
Headquarters
Ticker
Symbol
City
State
Website Address
ARE
Pasadena
CA
www.are.com
BMR
BXP
BDN
CIO
CXP
San Diego
Boston
Radnor
Dallas
Atlanta
CA
MA
PA
TX
GA
www.biomedrealty.com
www.bostonproperties.com
www.brandywinerealty.com
www.cityofficereit.com
www.columbiapropertytrust
.com
Appendix C: REITs by Sector
189
Table C.10 Office REITs (continued)
Company Name
Corporate Office
Properties Trust
Cousins Propertiesb
Douglas Emmett, Inc.
Easterly Government
Properties, Inc.
Empire State Realty
Trust, Inc.
Equity Commonwealth
First Potomac Realty
Trust
Franklin Street
Properties
Corporation
Government Properties
Income Trust
Gramercy Property
Trust, Inc.c
Highwoods Properties
Hudson Pacific
Properties, Inc.
Kilroy Realty Corp.
Mack-Cali Realty
New York REIT, Inc.
NorthStar Realty
Europe
Paramount Group, Inc.
Parkway Propertiesb
Piedmont Office Realty
Trust, Inc.
Select Income REIT
SL Green Realty Corp.
TIER REIT, Inc.
a BioMed
Headquarters
Ticker
Symbol
City
State
Website Address
OFC
Columbia
MD
www.copt.com
CUZ
DEI
DEA
Atlanta
Santa Monica
Washington
GA
CA
DC
www.cousinsproperties.com
www.douglasemmett.com
easterlyreit.com
ESRT
New York
NY
EQC
FPO
Chicago
Bethesda
IL
MD
www.empirestaterealtytrust
.com
www.eqcre.com
www.first-potomac.com
FSP
Wakefield
MA
www.franklinstreetproperties
.com
GOV
Newton
MA
www.govreit.com
GPT
New York
NY
www.gptreit.com
HIW
HPP
Raleigh
Los Angeles
NC
CA
KRC
CLI
NYRT
NRE
Los Angeles
Edison
New York
New York
CA
NJ
NY
NY
www.highwoods.com
www.hudsonpacific
properties.com
www.kilroyrealty.com
www.mack-cali.com
www.nyrt.com
www.nrecorp.com
PGRE
PKY
PDM
New York
Orlando
Johns Creek
NY
FL
GA
www.paramount-group.com
www.pky.com
www.piedmontreit.com
SIR
SLG
TIER
Newton
New York
Dallas
MA
NY
TX
www.sirreit.com
www.slgreen.com
www.tierreit.com
was acquired in early 2016 and no longer is public.
and Parkway are merging during 2016.
c
In December 2015, Gramercy acquired Chambers Street Properties (former NYSE: CSG).
Source: NAREIT, S&P Global Market Intelligence.
b Cousins
190
Appendix C: REITs by Sector
Table C.11
Apartment REITs
Company Name
American Campus
Communities, Inc.‡
Apartment Investment
and Management
Company
AvalonBay
Communities, Inc.
Bluerock Residential
Growth REIT, Inc.
Camden Property Trust
Campus Crest
Communities, Inc.‡, a
Education Realty Trust‡
Equity Residential
Essex Property Trust
Independence Realty
Trust, Inc
Mid-America
Apartment
Communities, Inc.
Monogram Residential
Trust, Inc.
NexPoint Residential
Trust, Inc.
Post Properties, Inc.
Preferred Apartment
Communities, Inc.
UDR, Inc.
Headquarters
Ticker
Symbol City
State Website Address
ACC
Austin
TX
www.americancampus.com
AIV
Denver
CO
www.aimco.com
AVB
Arlington
VA
www.avalonbay.com
BRG
New York
NY
CPT
CCG
Houston
Charlotte
TX
NC
www.bluerock
residential.com
www.camdenliving.com
N/A
EDR
EQR
ESS
IRT
Memphis
Chicago
San Mateo
Philadelphia
TN
IL
CA
PA
www.edrtrust.com
www.equityapartments.com
www.essex.com
www.irtreit.com
MAA
Memphis
TN
www.maac.com
MORE
Plano
TX
NXRT
Dallas
TX
www.MonogramResidential
Trust.com.
www.nexpointliving.com
PPS
APTS
Atlanta
Atlanta
GA
GA
www.postproperties.com
www.pacapts.com
UDR
Highlands Ranch CO
www.udr.com
‡ These
REITs own student housing.
In January 2016, Campus Crest was taken private.
Source: NAREIT, S&P Global Market Intelligence.
a
Table C.12
Manufactured Housing
Company Name
Equity LifeStyle
Properties, Inc.
Sun Communities, Inc.
UMH Properties, Inc.
Headquarters
Ticker
Symbol
City
State
Website Address
ELS
Chicago
IL
www.equitylifestyle.com
SUI
UMH
Southfield
Freehold
MI
NJ
www.suncommunities.com
www.umh.com
Source: NAREIT, S&P Global Market Intelligence.
Appendix C: REITs by Sector
191
Table C.13 Single-Family Home REITs
Headquarters
Company Name
Ticker
Symbol
City
State
Website Address
American Homes 4 Renta
AMH
Agoura Hills
CA
American Residential
Properties, Inc.a
Colony Starwood Homesb
Silver Bay Realty Trust
Corp.
ARPI
--
--
www.americanhomes4rent
.com
N/A
SFR
SBY
Scottsdale
Plymouth
AZ
MN
www.colonystarwood.com
www.silverbayrealtytrustcorp
.com
a These
companies merged in February 2016.
Late in 2015, Starwood Waypoint Residential Trust (former NYSE: SWAY) merged with Colony American
Homes.
Source: NAREIT, S&P Global Market Intelligence.
b
Table C.14 Shopping-Center REITs
Company Name
Acadia Realty Trust
Brixmor Property Group,
Inc.
Cedar Realty Trust, Inc.
DDR Corp.
Equity One, Inc.
Federal Realty
Investment Trust
Inland Real Estate
Corporation a
Kimco Realty Corporation
Kite Realty Group Trust
Ramco-Gershenson
Properties Trust
Regency Centers
Corporation
Retail Opportunity
Investments Corp.
Retail Properties of
America, Inc.
Saul Centers, Inc.
Tanger Factory Outlet
Centers, Inc.
Urban Edge Properties
Urstadt Biddle Properties
Weingarten Realty
Investors
Wheeler Real Estate
Investment Trust, Inc.
a This
Headquarters
Ticker
Symbol City
State Website Address
AKR
BRX
Rye
New York
NY
NY
www.acadiarealty.com
www.brixmor.com
CDR
DDR
EQY
FRT
Port Washington
Beachwood
North Miami Beach
Rockville
NY
OH
FL
MD
www.cedarrealtytrust.com
www.ddr.com
www.equityone.net
www.federalrealty.com
IRC
Oak Brook
IL
N/A
KIM
KRG
RPT
New Hyde Park
Indianapolis
Farmington Hills
NY
IN
MI
www.kimcorealty.com
www.kiterealty.com
www.rgpt.com
REG
Jacksonville
FL
www.regencycenters.com
ROIC
San Diego
CA
www.roireit.net
RPAI
Oak Brook
IL
www.rpai.com
BFS
SKT
Bethesda
Greensboro
MD
NC
www.saulcenters.com
www.tangeroutlet.com
UE
UBA
WRI
New York
Greenwich
Houston
NY
CT
TX
www.uedge.com
www.ubproperties.com
www.weingarten.com
WHLR
Virginia Beach
VA
www.whlr.us
REIT was taken private in 2016 and is no longer public.
Source: NAREIT, S&P Global Market Intelligence.
192
Appendix C: REITs by Sector
Table C.15
Mall REITs
Company Name
CBL & Associates
Properties, Inc.
General Growth
Properties, Inc.
Macerich Company
Pennsylvania REIT
Rouse Properties, Inc.†
Simon Property Group, Inc.
Taubman Centers, Inc.
WP Glimcher, Inc.
Headquarters
Ticker
Symbol City
State Website Address
CBL
Chattanooga
TN
www.cblproperties.com
GGP
Chicago
IL
www.ggp.com
MAC
PEI
RSE
SPG
TCO
WPG
Santa Monica
Philadelphia
New York
Indianapolis
Bloomfield Hills
Columbus
CA
PA
NY
IN
MI
OH
www.macerich.com
www.preit.com
www.rouseproperties.com
www.simon.com
www.taubman.com
www.wpglimcher.com
† This
company is being or has recently been acquired and may no longer exist.
Source: NAREIT, S&P Global Market Intelligence.
Table C.16
Freestanding Retail REITs
Headquarters
Company Name
Ticker
Symbol
City
State
Website Address
Agree Realty Corporation
Getty Realty Corp.
National Retail Properties, Inc.
Realty Income Corporation
Seritage Growth Properties
Spirit Realty Capital, Inc. a
STORE Capital Corporation
ADC
GTY
NNN
O
SRG
SRC
STOR
Bloomfield Hills
Jericho
Orlando
San Diego
New York
Dallas
Scottsdale
MI
NY
FL
CA
NY
TX
AZ
www.agreerealty.com
www.gettyrealty.com
www.nnnreit.com
www.realtyincome.com
www.seritage.com
www.spiritrealty.com
www.storecapital.com
a This
company recently moved its headquarters from Scottsdale, Arizona, to Dallas, Texas.
Source: NAREIT, S&P Global Market Intelligence.
Table C.17
Self-Storage REITs
Company Name
CubeSmart
Extra Space Storage, Inc.
National Storage Affiliates
Trust
Public Storage
Sovran Self Storage, Inc.
Ticker
Symbol City
Headquarters
State Website Address
CUBE
EXR
NSA
Malvern
PA
Salt Lake City
UT
Greenwood Village CO
PSA
SSS
Glendale
Williamsville
Source: NAREIT, S&P Global Market Intelligence.
CA
NY
www.cubesmart.com
www.extraspace.com
www.nationalstorage
affiliates.com
www.publicstorage.com
www.unclebobs.com
D
A P P E N D I X
REITs with Credit Ratings
193
Ticker
ARE
AAT
ACC
AMT.REIT
AIV
AVB
BXP
BDN
BRX
CPT
CCP
CBL
CMCT
CXP
OFC
CCI.REIT
CUBE
DCT
DDR
DLR
DRE
EGP
Company Name
INVESTMENT GRADE RATED
Alexandria Real Estate
American Assets Trust Inc.
American Campus Communities
American Tower Corp.
Aimco
AvalonBay Communities, Inc.
Boston Properties, Inc.
Brandywine Realty Trust
Brixmor Property Group, Inc.
Camden Property Trust
Care Capital Properties, Inc.
CBL & Associates Properties
CIM Commercial Trust Corp.
Columbia Property Trust
Corporate Office Properties Trust
Crown Castle International
CubeSmart
DCT Industrial Trust, Inc.
DDR Corp.
Digital Realty Trust, Inc.
Duke Realty Corp.
EastGroup Properties, Inc.
BBB–
BBB
BBB
BBB
BBB–
BBB–
BBB+
BBB–
BBB–
BBB+
BBB–
BBB–
BBB
BBB-
BBB
Ba1
Baa3
Baa2
Baa2
Baa2
(P)Baa3
Baa2
Baa3
Baa3
Baa2
Baa1
(P)Baa2
Ba1
(P)Ba1
Baa1
Baa2
Baa3
Baa3
Baa3
BBB
BBB–
BBB–
BBB
BBB–
BBB–
BBB
BBB
BBB–
BBB–
BBB
BBB–
BBBA–
A–
BBB–
BBB–
BBB+
BB+
BBB–
Corporate Rating by Agency
Fitch Ratings Moody’s S&P
Baa2
Baa2
Baa2
Baa2
Baa3
Baa3
Baa2
Baa3
Baa3
Baa3
BBB
BBB–
BBB–
BBB+
BBB
Baa2
Ba1
Baa1
Baa1
(P)Baa2
Baa3
Baa2
BBB–
BBB–
BBB+
A–
BBB–
BBB–
REIT OP
Senior Unsecured Rating by Agency
Rating
Moody’s Fitch Ratings Moody’s S&P
194
Appendix D: REITs with Credit Ratings
EDR
EPR
EQC
EQY
EQR
ESS
FRT
FR
FSP
Education Realty Trust, Inc.
EPR Properties
Equity Commonwealth
Equity One, Inc.
Equity Residential
Essex Property Trust, Inc.
Federal Realty Investment
First Industrial Realty Trust
Franklin Street Properties
Government Properties Income
Trust
Gramercy Property Trust, Inc.
HCP, Inc.
Healthcare Realty Trust, Inc.
Healthcare Trust of America
Highwoods Properties, Inc.
Hospitality Properties Trust
Host Hotels & Resorts
Hudson Pacific Properties, Inc.
Kilroy Realty Corp.
Kimco Realty Corp.
Kite Realty Group Trust
Lexington Realty Trust
Liberty Property Trust
MAA
GOV
GPT
HCP
HR
HTA
HIW
HPT
HST
HPP
KRC
KIM
KRG
LXP
LPT
MAA
Ticker
Company Name
BBB
BBB
BBB
BBB+
BBB–
BBB–
BBB+
BBB
A–
BBB+
A–
BBB–
BBB–
Baa3
Baa2
Baa2
Baa3
Baa3
Baa1
Baa3
Baa2
(P)Baa2
Baa1
Baa2
Baa3
Baa3
(P)Ba1
Baa2
Baa3
Baa2
Baa2
(P)Baa3
A3
BBB–
BBB–
BBB+
BBB–
BBB
BBB
BBB–
BB+
BBB–
BBB
BBB+
BBB–
BB+
BBB
BBB
BBB–
BB+
BBB–
BBB
A–
BBB
A–
BBB–
Corporate Rating by Agency
Fitch Ratings Moody’s S&P
Baa1
Baa2
Baa2
(P)Baa3
Baa2
Baa2
Baa2
Baa3
Baa3
Baa1
Baa2
Baa3
BBB
BBB+
BBB+
BBB
A–
A–
BBB–
Baa2
Baa1
Baa2
Baa2
Baa1
Baa2
Baa3
A3
Baa2
Baa3
Baa2
BBB–
BBB+
BBB–
BBB+
BBB–
BBB–
A–
BBB–
BBB–
BBB
REIT OP
Senior Unsecured Rating by Agency
Rating
Moody’s Fitch Ratings Moody’s S&P
Appendix D: REITs with Credit Ratings
195
Ticker
NNN
OHI
PKY
DOC
PDM
PPS
PCH
PLD
PSB
PSA
RYN
O
REG
ROIC
RPAI
REXR
SIR
SNH
SPG
SLG
SSS
STAG
STOR
SKT
Company Name
National Retail Properties
Omega Healthcare Investors
Parkway Properties, Inc.
Physicians Realty Trust
Piedmont Office Realty Trust
Post Properties, Inc.
Potlatch Corp.
Prologis, Inc.
PS Business Parks, Inc.
Public Storage
Rayonier, Inc.
Realty Income Corp.
Regency Centers Corp.
Retail Opportunity Investments
Retail Properties of America
Rexford Industrial Realty, Inc.
Select Income REIT
Senior Housing Properties
Simon Property Group
SL Green Realty Corp.
Sovran Self Storage, Inc.
STAG Industrial, Inc.
STORE Capital Corp.
Tanger Factory Outlet Centers
A
BBB–
BBB
BBB
BBB–
BBB–
BBB+
BBB
BBB
BBB+
BBB–
BBB+ Baa1
(P)Baa2
A2
(P)Baa3
Baa2
Baa1
Baa2
Baa1
Baa3
Baa2
Baa2
BBB–
BBB–
A
BBB–
BBB
BBB
BBB
BB
BBB+
A–
A
BBB–
BBB+
BBB
BBB–
BBB–
(P)Baa3
Baa3
Baa3
Baa2
Baa2
(P)A2
Baa2
Baa1
Baa2
Baa2
Baa3
BBB–
BBB–
BBB
BBB+
BBB+
BBB–
(P)Baa3
Baa3
Baa3
(P)A2
Baa2
Baa1
Baa3
Baa1
Baa3
BBB–
BBB
BBB–
BBB–
BBB–
BBB–
BBB+
BB
BBB+
BBB–
REIT OP
Senior Unsecured Rating by Agency
Rating
Moody’s Fitch Ratings Moody’s S&P
Baa2
Baa3
(P)A3
(P)Baa3
BBB+
BBB–
BBB–
Baa1
Baa3
Baa3
Corporate Rating by Agency
Fitch Ratings Moody’s S&P
196
Appendix D: REITs with Credit Ratings
TRNO
UDR
VTR
VNO
WPC
WRE
WRI
HCN
WY
WPG
Terreno Realty Corp.
UDR, Inc.
Ventas, Inc.
Vornado Realty Trust
W. P. Carey, Inc.
Washington REIT
Weingarten Realty Investors
Welltower, Inc.
Weyerhaeuser Co.
WP Glimcher, Inc.
CareTrust REIT, Inc.
Communications Sales &
Leasing, Inc.
Corrections Corp. of America
CyrusOne, Inc.
DuPont Fabros Technology, Inc.
Equinix, Inc. (REIT)
FelCor Lodging Trust, Inc.
Forest City Realty Trust, Inc.
Gaming and Leisure Properties
GEO Group, Inc.
Iron Mountain, Inc.
iStar Inc.
BB–
BB
Ba1
Ba3
B3
B2
Ba1
Ba3
Ba3
B2
B2
Baa3
CSAL
CXW
CONE
DFT
EQIX.REIT
FCH
FCE.A
GLPI
GEO
IRM
STAR
Baa1
(P)Baa2
Baa3
Baa2
Baa2
Baa1
Baa2
Baa2
Ba1
B2
BB–
BB+
BBB–
BBB+
BBB+
BBB
BBB–
CTRE
RATED, NONINVESTMENT GRADE
Ticker
Company Name
BB
BB–
B+
B+
B+
BB+
B+
BB–
BB
B
B
B3
B1
Ba1
BB
BB–
BB+
BBB+
Ba3
Ba3
B2
B2
B1
Caa1
Baa3
Baa2
Baa2
Baa1
Baa2
Baa2
Baa1
BB–
B+
B+
BB
B–
BB+
BBB–
BBB
BBB
BBB
BBB–
BBB+
REIT OP
Senior Unsecured Rating by Agency
Rating
Moody’s Fitch Ratings Moody’s S&P
BBB+
BBB+ Baa1
BBB+ Baa2
BBB
BBB
BBB
BBB
BBB–
BBB–
Corporate Rating by Agency
Fitch Ratings Moody’s S&P
Appendix D: REITs with Credit Ratings
197
LAMR
.REIT
CLI
BB+
MPW
NRZ
OUT.REIT
PMT
QTS
RHP
SBRA
BB+
SRC
STWD
VER
Lamar Advertising Co.
As of December 31, 2015
Source: S&P Global Market Intelligence.
Mack-Cali Realty Corp.
Medical Properties Trust, Inc.
New Residential Investment Corp.
OUTFRONT Media, Inc.
PennyMac Mortgage Investment
QTS Realty Trust, Inc.
Ryman Hospitality Properties
Sabra Health Care REIT
Spirit Realty Capital, Inc.
Starwood Property Trust, Inc.
VEREIT, Inc.
Ticker
Company Name
Ba3
(P)Ba1
(P)Ba1
Ba1
B1
Ba3
B1
B2
Ba3
Ba3
Ba2
B+
B+
BB–
BB+
BB
BB
BB–
BB+
BB+
BB–
Corporate Rating by Agency
Fitch Ratings Moody’s S&P
Ba1
Ba3
Baa3
Ba1
(P)Ba1
BB–
REIT OP
Senior Unsecured Rating by Agency
Rating
Moody’s Fitch Ratings Moody’s S&P
198
Appendix D: REITs with Credit Ratings
Glossary
T
he following is a glossary of terms referenced in the REIT
industry and throughout this book. Some definitions are based on
information provided by NAREIT and company-specific documents
filed with the SEC; others were sourced from Barron’s Dictionary of
Real Estate Terms and from online resources such as Investopedia
.com and Leasing Professionals.com.
adjusted funds from operations (AFFO) As explained more fully in
Chapter 8, because it incorporates adjustments for noncash items
and deducts recurring capital expenditures (defined later in this
Glossary), AFFO represents a more normalized, recurring measurement of a REITS’s FFO (i.e., earnings). Please also refer to
Chapter 8.
basis point (bps) The daily, often tiny, percentage changes in financial instruments in a portfolio, such as the yield on a fixed-income
security, are expressed in basis points. A basis point is equal to
1/100 of a percentage point, so 1 percent equals 100 basis points.
base rent The minimum rent due to a landlord, as defined in a lease.
Please refer to the discussion of rent in Chapter 4.
base (expense) year As explained in Chapter 4, a base year typically
is the first year of a lease, during which time the landlord determines the actual taxes and operating expenses associated with a
tenant’s occupying their space. After the base year, the landlord
agrees to pay an expense amount based on base year expenses, and
the tenant pays any increases in expenses over the base amount.
C-Corporations A C-Corporation is a legal entity that is separate and
distinct from its owners. Corporations enjoy most of the rights and
responsibilities that an individual possesses, such as the right to
enter into contracts, loan and borrow money, hire employees, own
assets, and pay taxes. The most important aspect of a corporation
is limited liability; that is, shareholders of a corporation have the
199
200
Glossary
right to participate in the profits, through dividends and/or the
appreciation of stock, but are not held personally liable for the
company’s debts.
capital expenses GAAP requires that certain expenditures be classified as capital expenses rather than operating expenses. There are
two primary classifications of capital expenses, or “capex”:
1. Recurring capex is money spent on improvements to a
property that facilitate its leasing but that are nonstructural.
Examples of such expenditures include leasing commissions
and tenant improvement paid to lease a space, both of which
are capitalized and then amortized over the life of the lease.
2. Nonrecurring capex is money invested in structural improvements that extend the life of a property, such as constructing a
parking deck. Because they involve structural enhancements,
nonrecurring capex dollars are not expensed; instead, they
are capitalized into the basis of a property. So if a property was
worth $25 million and the landlord builds a $5 million parking deck, all else being equal the new basis of the property
would be $30 million.
capitalization rate A capitalization (or “cap”) rate measures the
expected unleveraged return of an asset. The cap rate for a property is determined by dividing the property’s net operating income
(NOI, defined later in the Glossary) by its purchase price. Thought
of another way, cap rates are the inverse of a price/earnings ratio,
where earnings are measured by property-level NOI. High cap
rates generally indicate higher expected returns and/or greater
perceived risk. Please refer to Chapter 8 for additional information.
cash available for distribution (CAD) Cash available for distribution
better approximates a REIT’s free cash flow than AFFO and, therefore, is a more meaningful denominator for determining a REIT’s
dividend safety. CAD is calculated by subtracting the following
items from AFFO: capitalized interest expense and monthly
principal and interest payments due on secured debt (excluding
maturities). Please see Chapter 8 for more information.
cash NOI Cash NOI adjusts the NOI calculated from a REIT’s
statement of operations (also known as its income statement) to
exclude the effects of straight-lined rent. Please see Chapter 8 for
more information.
Glossary
201
common area maintenance (CAM) “Common areas” are areas
within a property that are used by all tenants, such as an office
building’s lobby, sidewalks, landscaping, parking lot lighting, and
snow removal services. As explained in Chapter 4, certain lease
structures allow a landlord to charge tenants for their proportionate shares of the additional cost to maintain a property’s common
areas. CAM charges therefore are additional rent charged for
maintenance that benefits all tenants.
cost of capital Cost of capital is the cost a company bears to have a
form of equity and debt capital issued and outstanding. The cost of
common stock generally is considered to include the dividend rate
paid to shareholders plus investors’ expected equity growth rate,
the two of which typically total between 8 and 12 percent annually.
The cost of preferred stock equals the dividend or “coupon” payment associated with each preferred share. The cost of debt capital
is the interest rate associated with each type of debt (e.g., mortgage
loan or senior note) issued by a company. Please see Chapter 7 for
additional information.
diversification See portfolio diversification.
EBITDA Earnings before interest, taxes, depreciation, and amortization.
economic cycle The natural fluctuation of an economy between
periods of expansion (growth) and contraction (recession).
economic indicator According to Investopedia.com, an economic
indicator is a piece of economic data, such as the weekly employment report, used by investors to interpret the overall health of
the economy.
equity market capitalization (EMC) A company’s equity market capitalization is calculated by multiplying the stock price times the
number of common shares outstanding. If the REIT is an UPREIT
or has a DownREIT structure, the number of operating partnership (OP) units outstanding should be added to the common
share count before multiplying by the stock price. Please refer to
Chapter 8 for additional information.
escalation clauses Provisions in a lease that allow a landlord to pass
through increases in operating expenses subject to the first- or
“base”-year expense levels. Rent escalations usually occur on an
202
Glossary
annual basis and tend to be tied to increases in the Consumer Price
Index or are expressed as fixed periodic increases. Please refer to
Chapter 4 for additional information.
exchange-traded fund (ETF) According to Investopedia.com, an
exchange-traded fund (ETF) is a marketable security designed
to track the performance of an index, a commodity, bonds, or a
basket of assets. Unlike mutual funds, an ETF trades like a common stock on a stock exchange and experiences price changes
throughout the day as they are bought and sold.
Fannie Mae The Federal National Mortgage Association (commonly
known as Fannie Mae) was established as a federal agency in
1938. In 1968 Congress chartered Fannie Mae as a private
shareholder-owned company. Fannie Mae is a governmentsponsored enterprise that operates in the U.S. secondary
mortgage market, rather than making home loans directly to
consumers.
fee simple interest Also referred to as “fee simple absolute” and “fee
simple estate,” fee simple interest in a property indicates the owner
has absolute ownership of a property and the unconditional right
to dispose of it. For example, most homeowners have a fee simple
interest in their homes and can sell the property at their convenience or transfer ownership to an heir upon their deaths.
Freddie Mac Created in 1970, the Federal Home Loan Mortgage
Corporation (commonly known as Freddie Mac) is similar to Fannie Mae in that it is a government-sponsored enterprise whose
mission is to provide liquidity to the secondary mortgage market.
FTSE NAREIT REIT indexes Indexes published by the National
Association of REITs (NAREIT) to track the performance of REITs.
The FTSE NAREIT REIT indexes are not publicly traded; they
simply aggregate performance data on the component REITs.
full-service lease A lease in which the tenant pays the landlord a
fixed monthly rent that includes an expense stop calculated off
of a base year. The landlord then pays all the monthly expenses
associated with operating the property, including utilities, water,
taxes, janitorial, trash collection, landscaping, and so forth. The
tenant gets “full service” in exchange for the monthly rent and
Glossary
203
does not have to contract with service providers directly. Please
refer to Chapter 4 for additional information.
funds from operations (FFO) A supplemental though more broadly
used measurement of REIT earnings, created by the REIT industry in 1991 and recognized by the SEC in 2003. FFO is the REIT
equivalent of earnings. Please refer to Chapter 8 for more detail.
Garn–St. Germain Act of 1982 The federal law that deregulated the
savings and loan industry.
generally accepted accounting principles (GAAP) The set of rules
considered standard and acceptable by Certified Public Accountants.
Global Industry Classification Standard (GICS) According to the
website www.msci.com/gics, MSCI and Standard & Poor’s developed the GICS in 1999 to create an efficient investment tool
that would capture the breadth, depth, and evolution of industry
sectors. GICS is a four-tiered industry classification system that
originally consisted of 10 investment sectors, 24 industry groups,
67 industries, and 156 subindustries. On September 1, 2016, Real
Estate will become the 11th GICS sector.
gross absorption According to CBRE (www.cbre.us), the absorption
rate is the rate at which rentable space is filled. Gross absorption is a
measure of the total square feet leased over a specified period with
no consideration given to space vacated in the same geographic
area during the same time period. (See also net absorption.)
gross lease A lease wherein the tenant pays a fixed monthly rent
to the landlord; the landlord pays the property expenses, which
includes insurance, utilities, and repairs, and usually property
taxes. Please refer to Chapter 4 for additional information.
hedging According to Investopedia.com, a hedge is an investment to
reduce the risk of adverse price movements in an asset. Hedging is
analogous to taking out an insurance policy. If you own a home in a
flood-prone area, you will want to protect yourself financially from
the risk of flood damage—to hedge, in other words—by taking out
flood insurance.
Internal Revenue Service (IRS) The U.S. government agency
responsible for the collection and enforcement of taxes.
204
Glossary
Established in 1862 by President Lincoln, the IRS operates
under the authority of the U.S. Department of the Treasury.
lease A lease is a legal agreement between a landlord (the lessor) and
a tenant (the lessee) whereby the tenant agrees to pay a monthly
sum for a defined period of time (rent) in exchange for the right
to occupy the landlord’s space. Please refer to Chapter 4 for additional information.
limited partnership (LP) interests A partnership between at least
two partners, one of whom is passive and whose liability in the
venture is limited to his amount invested, and the active partner,
whose liability in the venture extends beyond his monetary
investment. Please refer to Chapter 6 for additional information.
market rent The rate a landlord could charge a tenant to occupy
space, based on the competing spaces and current market conditions. Please refer to Chapter 4 for additional information.
modified gross lease A lease in which the tenant pays rent plus the
property taxes and insurance, and any increases in these items over
the base year. Please refer to Chapter 4 for additional information.
MSCI® US REIT Index (RMZ and RMS) A real-time, price-only
index, the ticker symbol for which is RMZ. At December 31, 2015,
the RMZ tracked the price movements of approximately 150
equity REITs. Mortgage and hybrid REITs are not included in this
index. MSCI® also publishes the RMS, a daily total return version
of the RMZ, which encompasses the companies’ dividend yields.
The RMS is not a real-time index; total returns for the constituent
REITs are published at the end of the day.
NAREIT The National Association of Real Estate Investment Trusts
is the worldwide representative voice for REITs and publicly traded
real estate companies with an interest in U.S. real estate and capital
markets. Please see www.reit.com for more information.
net absorption Calculated as the amount of occupied square feet at
the end of a period, less the amount of square feet leased at the
beginning of a period, net absorption measures the square feet
leased in a specific geographic area over a fixed period of time,
after taking into account any space vacated in the same area during
the same period. (See also gross absorption.)
Glossary
205
net asset value (NAV) An estimate of the current market value of all
of a company’s tangible assets, including but not limited to its properties, less the sum of all of a company’s liabilities and obligations.
Please refer to Chapter 8 for additional information.
net, double-net, and triple-net lease As described in Chapter 4,
there are three levels of “net” when referencing lease structures
wherein expenses are paid by the tenant as part of total rent:
(1) maintenance, which includes items like utilities, water, janitorial, trash collection, and landscaping; (2) insurance; and
(3) taxes.
• A net lease generally implies that the tenant pays rent and the
costs of maintaining the property; the landlord pays the insurance and taxes.
• In a double-net lease, the tenant pays rent, including the taxes
and insurance; the landlord pays the maintenance costs.
• In a triple-net lease, the tenant pays rent to the landlord and
pays all costs associated with maintenance, insurance, and
taxes. The landlord essentially collects monthly “coupon”
payments, as if he owned a bond.
net operating income (NOI) The owner’s rental revenues from
property less all property operating expenses, including taxes
and insurance. The term ignores depreciation and amortization
expenses as well as interest on loans incurred to finance the
property. Please also refer to Chapter 8.
non-recurring capex See Capital expenses
operating partnership unit (OP unit) Units of ownership in a REIT
that generally can be exchanged on a one-for-one basis into common stock of the REIT but that are not publicly traded. Please refer
to Chapter 6 for more detail.
percentage rents Additional rent payable to the landlord, based on
a percentage of the volume of tenant sales generated on a property. The percentage is usually based on base year sales volume.
For example, a retailer’s lease may require contractual rent plus
percentage rents equal to 1 percent of sales revenue that exceed
sales revenue achieved in the first year of operations. Please refer
to Chapter 4 for additional information.
206
Glossary
portfolio diversification The act of investing in different asset
classes and securities (i.e., stocks and bonds) in order to reduce
investment risk and to enhance the expected return from an
invested amount.
positive spread investing The ability to raise capital at a cost significantly less than the initial returns that can be obtained on real
estate transactions.
property cycle According to Wikipedia.com, the property cycle is a
sequence of recurrent and predictable events reflected in demographic, economic, and emotional factors that affect supply and
demand for property.
R&D property Industrial buildings in which research and development (R&D) processes are performed, including any assembly,
manufacturing, or office space required to support them. R&D
buildings typically have a parking ratio of at least three parking
spaces per 1,000 square feet, are one to two stories high, and
feature interior clear heights of less than 18 feet.
Real Estate Investment Trust Act of 1960 The federal law that
authorized REITs. Its purpose was to allow small investors to pool
their investments in real estate to get the same benefits as might
be obtained by direct ownership while also diversifying their risks
and obtaining professional management.
real estate investment trust (REIT) A REIT is essentially a corporation or business trust that combines the capital of many investors
to own or provide financing for all forms of investment real estate.
A REIT is generally not required to pay corporate income tax if it
distributes at least 90 percent of its taxable income to shareholders
each year.
REIT Modernization Act of 1999 (RMA) The federal law that
further increased REITs’ abilities to operate as fully integrated
operating companies, primarily by allowing REITs to provide
tenant services through taxable REIT subsidiaries (TRSs). The
RMA became effective in 2001.
recurring capex See Capital expenses
REIT Simplification Act of 1994 Predecessor to the REIT Modernization Act, the REIT Simplification Act was the federal law that
Glossary
207
streamlined the REIT structure, enabling management teams to
operate their companies as more fully integrated businesses.
revenue per available room (RevPAR) The product of a hotel’s average daily room rate (ADR) and its daily occupancy rate.
RMZ and RMS See MSCI® US REIT index.
Securities and Exchange Commission (SEC) A government commission created by Congress to regulate the securities markets
and protect investors. In addition to regulation and protection, it
also monitors the corporate takeovers in the United States. The
SEC is composed of five commissioners appointed by the U.S.
President and approved by the Senate.
straight-lined rent In compliance with GAAP, REITs “straight line”
the rental income they receive by reporting the average annual
rent to be received over the life of a lease instead of the actual
cash received. The straight-lined rent adjustment REITs report is
the amount to be added to or subtracted from GAAP rents to arrive
at cash rents received. Please refer to Chapter 8.
taxable REIT subsidiary (TRS) Taxable REIT subsidiaries are
stand-alone corporations for tax purposes that are owned directly
or indirectly by a REIT. Created as part of the REIT Modernization
Act of 1999, TRSs allow REITs to compete more effectively with
other landlords by enabling REITs to provide nontraditional
services to tenants or provide traditional real estate management
services to third parties. TRSs also allow REITs the (limited) ability
to invest in and derive income from nonrental real estate assets.
Tax Reform Act of 1986 The federal law that substantially altered
the real estate investment landscape by permitting REITs not
only to own but also to operate and manage most types of
income-producing commercial properties. It also eliminated real
estate tax shelters that had attracted capital from investors based
on the amount of losses that could be created.
total market capitalization The sum of a REIT’s equity market capitalization, plus the liquidation value of any preferred stock outstanding, and the principal amounts of debt outstanding.
total return A stock’s dividend income plus capital appreciation,
before taxes and commissions.
208
Glossary
Transparency Corporate transparency describes the extent to which
a corporation’s actions are observable by outsiders.
Treasury inflation-protected securities (TIPS) First issued by the
U.S. government in 1997, TIPS are a Treasury security that
is indexed to inflation. According to Vanguard Investment
Counseling & Research, TIPS are like most other bonds in that
they are issued with a fixed coupon interest rate and a fixed
maturity date. Unlike traditional bonds, TIPS have a principal
value that the Treasury raises (or lowers) each month to keep
pace with inflation. As a result, the semiannual coupon payments
to investors also change, because they are derived by applying the
fixed coupon rate to an inflation-adjusted principal amount.
triple-net lease See net, double-net, and triple-net lease, as well as
Chapter 4.
UPREIT Umbrella partnership real estate investment trust. Please
refer to Chapter 6 for information.
Index
Note: Page references followed by “f” and “t” indicate an illustrated figure and table,
respectively.
A
Adjusted funds from operations (AFFO),
133, 137, 139–140, 201
payout ratios, 147–148
After-tax income, example, 35t
Allocation, 21
capital allocation, 21, 96
portfolio allocation, 21
American Realty Capital Properties,
accounting irregularities, 26
American Stock Exchange (AMEX),
REIT listing, 4
Anchor tenants, space (leasing), 80
Apartment REITs, 73–74, 191t
outperformance, 120–121
ranking, 74t
Apartment units, demand, 74–75
Assets
class (investment real estate size), 22f
held for sale assets, 152
management, 12
total asset value, 97
Average daily room rate (ADR), 64
C
Capital
formation, REIT returns (impact),
104–105
gains, 36, 37, 39
raising, emergency equity issuance, 112
returns, 36, 37–39, 37t
Capital expenses (capex), 202
nonrecurring capex, 202
recurring capex, 202
Capitalization rates (cap rates), 156–167,
202
equation, 156
implied capitalization rate, 158–159
Cash available for distribution (CAD), 137,
140, 202
GAAP net income, reconciliation, 138t
payout ratios, 147–148
Cash NOI, 202
quarterly run rate for calculating NAV,
151–156
C-Corporations, 201–202
after-tax income, example, 35t
Internal Revenue Code, impact, 96–97
marginal tax rates, 34
payout ratios, 34
CEM benchmarking study (U.S. defined
benefit pension plan performance), 24f
Central business district (CBD), 70
Commercial mortgage-backed securities
(CMBS), 68, 111
spreads, REIT returns (contrast), 112f
Commercial mortgage markets, mortgage
REIT focus, 69
Common area maintenance (CAM) fees,
44, 51, 77, 203
Common dividends, components, 36–39
B
Balance sheet metrics/analysis,
140–145
Base rent, 46, 201
Base year (expense year), 44, 201
Basis points (bps), 201
Benchmarks, impact, 110
Betas, 161–162
Billable NOI (contractual NOI,
cash NOI), 151
Building, useful life, 90
Bumps (rent escalations), 72
Bush tax cuts, impact, 39
209
210
Index
Common shareholders, dividend
payments, 40
Comparative compounded total annual
returns, 20t
Construction cycle, 116
Consumer Price Index (CPI),
increases, 19
Contract rent, 44
Corporate structures, transparency,
25–26
Cost of capital (weighted average cost of
capital), 143, 203
company impact, 13
importance, 127–129
Cost of equity (discount rate), calculation,
144
Coupon payments, 50
Current yield, calculation, 146
Cutter REITs, 127, 128f
D
Data center REITs, 57t, 184t
Debt
analysis, 143
impact, 32
problems, 127, 141
property-level debt, 6
senior debt, 6
total debt outstanding, 141
unsecured debt, 6
Debt-to-EBITDA multiples, 127
Debt-to-EBITDA ratio, 142–143
Debt-to-gross book ratio, 33, 141
Debt-to-gross book value ratio, 14,
32–33, 142
Debt-to-total capitalization ratio, 32
Debt-to-total market capitalization ratio,
32, 141–142
Defensive property types, demand
(steadiness), 118–123
Demand
inelastic demand, 113
oversupply/absence (property cycle
phase), 115–116
Densification (office leasing trend), 72–73
Diversified REITs, 55–56, 56t, 183t
Dividend discount model (DDM),
148–149
Dividends, 20, 27
after-tax income, example, 35t
capital gains, 37
capital, returns, 36, 37–39
cash payouts, 35–36
coverage, 147–148
cuts, 30
cutting, REIT returns (impact), 128f
debt-to-gross book value ratio, 32–33
debt-to-total market capitalization ratio,
32
dividend/FFO payout ratio, 31
monthly dividends, U.S. REIT payments,
29t
payout ratio, calculation, 148
preferred dividends, NAREIT-defined
FFO (adjustment), 139t
preferred stock dividends, 40
qualified dividends, REIT dividends
(contrast), 39
taxes, calculations (sample), 38t
yield, 146
Dividend safety
debt, impact, 32
quantification, 31–34
rules, 147
support, lease legal standing (impact),
33–34
Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act), 7
Double-net lease, 50, 207
Dow Jones Equity All REIT Index (REI), 17
Dow Jones Industrial Average, 99
DownREITs, 91, 91f
E
Earnings before interest, taxes,
depreciation, and amortization
(EBITDA), 142–143, 203
Earnings per share (EPS), 31, 136, 145
Economic conditions, real estate
performance lag, 122
Economic cycle, 203
impact, 114–117
property cycle response, 115f
Economic indicator, 203
Effective rent, 47
Equity (cost of), 143–144
Equity Market Capitalization (EMC), 7, 141,
203
Equity REITs, 4–6
Escalation clauses (in leases), 44–45,
203–204
Estate planning, OP units (impact), 90
Exchange-traded funds (ETFs), 17, 204
Index
Expansion (property cycle phase), 115
Expense stops, 45, 50
Expense year (base year), 44, 201
External growth, 12, 134
Externally advised/managed REITs, 95–96
F
Face value (par value), preferred shares
sale, 40
Fair market value (for NAV), 155–158
Federal Home Loan Mortgage Corporation
(FHLMC) (Freddie Mac), 69, 204
Federal National Mortgage Association
(FNMA) (Fannie Mae), 69, 204
Federal Savings and Loan Insurance
Corporation (FSLIC), creation, 104
Fee simple interest, 4, 6, 204
Financial Accounting Standards Boards
(FASB), usage, 52
Financial Industry Regulatory Authority
(FINRA), disclosure issues, 95
Financial Times Stock Exchange (FTSE)
NAREIT All REITs Index, 4, 6–7, 15, 55
Financial Times Stock Exchange (FTSE)
NAREIT Equity REITs (FNER), 101
annual dollar trading volume, 103f
level, 102f
Financial Times Stock Exchange (FTSE)
NAREIT REIT indexes, 204
First-generation space, TIs (usage), 48
5/50 test (REIT rule), 97
5 or fewer rule (REIT rule), 97
Float (common stock), 8
Foreign Investment in Real Property Act
(FIRPTA), changes (impact), 106–107
Free rent, 47
Freestanding retail REITs, 80–81,
80t, 193t
Full-service lease, 51, 72, 204–205
Funds available for distribution
(FAD), 137
Funds from operation (FFO), 31, 133, 205
adjusted funds from operation (AFFO),
139–140
expectations, 31
growth, earnings growth (comparison),
135–136
increase, 136
metric, 137–139
NAREIT-defined FFO, adjustment, 139t
payout ratio, 31, 147–148
Future earnings expectations, 114–115
211
G
Garn-St. Germain Act of 1982, 205
General and administrative (G&A) costs,
95, 136
Generally accepted accounting principles
(GAAP), 27, 137, 205
net income, reconciliation, 138
NOI, 151
Geographic concentration, risks/rewards,
12
Global financial crisis, property types (total
returns), 119f
Global Industry Classification Standard
(GICS), 101, 205
Real Estate sector, creation, 108, 129
Global real estate, portfolio allocations, 23f
Government-sponsored entities (GSEs), 69
Great Recession (2008–2009)
impact, 14, 30, 59, 106
triggering, 114
Gross absorption, 205
Gross book value, calculation, 32–33
Gross industrial lease, 50
Gross lease, 49–50, 205
Gross rent, 46
Gross square feet (gross building area), 47
Ground lease, 6
Growth strategy (REITs), 12–13
risk axioms, 13
H
Health-care REITs, 59–62, 185t–186t
performance, 122
ranking, 60t
risks/rewards, 61–62
Hedging, 24, 205
Held for sale (HFS) assets, 152
Historical same-store NOI growth rates, 155t
Hotel REITs
average daily room rate (ADR), 64
guest leases, absence, 125
performance, U.S. GDP (contrast), 126t
revenue per available room (RevPAR), 64
risks/rewards, 66
technical aspects, 64, 66
underperformance, 119
volatility, increase (investment
opportunity), 125
Hybrid REITs, 7
I
Implied capitalization rate, 158–159, 159t
Income tests (REIT rule), 97
212
Index
Indices, REIT total returns (contrast),
100t
Industrial property/space, demand,
63, 121
Industrial REITs, 62–63, 186t
performance, 121
ranking, 62t
risks/rewards, 63
Industry market cap, REIT common stock
issuance/growth, 111f
Inelastic demand, 113
Inflation
hedge, REITs (usage), 23–25
inflation-adjusted earnings, generation,
24
total return, comparison, 25t
Infrastructure REITs, 58t, 185t
Initial public offerings (IPOs), 8–9,
104–105
In-service portfolio, 138
fair market value, calculation, 155–157
run rate, estimation, 154
In-service properties, 153, 155
Interest rate environment, REIT
performance (relationship), 129–130
Internal growth, 12, 134
Internal rate of return (IRR), 158
Internal Revenue Service (IRS), 3,
205–206
Investment real estate, asset class size, 22t
Investments
fair market value, adjustment, 157–158
REITs, contrast, 108–112
iShares Cohen & Steers REIT ETF
(ICF), 17
iShares U.S. Real Estate ETF (IYR), 17
J
Jobs and Growth Tax Relief Reconciliation
Act of 2003 (Bush Tax Cuts), 39
K
Keeper REITs, 127, 128f
L
Lagging economic indicator, 114–115
Landlord services, provision, 105
Leases, 43, 206
accounting, standard (changes), 52
base year, 44
capped expenses (expense stops), 45
common area maintenance (CAM), 44
double-net lease, 50, 207
duration, 43, 52–53
escalation clauses, 44–45
expense stops, 45
full-service lease, 51
gross lease, 49–50, 205
ground lease, 6
guest leases, absence, 125
leasing commissions (LCs), 45
legal standing, impact, 33–34
length, 43, 122–123, 162t
long-term leases, volatility (reduction),
124
modified gross lease, 50–51
net lease, 50, 207
operating expenses, 45
rent, 46–47
short-term leases, volatility (increase),
125
square feet, 47
structure, impact (process), 122–123
tenant bankruptcy, comparison, 51–53
tenant improvement (TI) allowance,
47–48
terminology, 44–48
terms, 43, 63, 72
triple-net-leases, 52, 56–59, 207
types, 48, 49t
Leasing commissions (LCs), 45
Lessees, 4, 43
Lessors, 4, 6, 43
Leverage, 14, 140–141
Limited partnerships (LPs)
interests, 89–90, 206
real estate investment trusts (REITs),
98, 98t
real estate limited partnerships (RELPs),
98, 105
units, contribution (IRS perspective), 90
Liquidity, 20–21
increase, stock index inclusion (impact),
106
volatility, contrast, 92
Liquid real assets, 16
Loans, securitization/packaging, 68
Lodging/resort REITs, 63–66, 187t
hotel expenses, 64
hotel REITs, technical aspects, 64, 66
hotel revenue, 64
ranking, 65t
Long-term capital gains, 39
Index
Long-term leases, volatility (reduction),
124
Long-term triple-net leases, usage,
61–62, 81
M
Mall REITs, 79–80, 79t, 193t
Management
shareholders, alignment, 105–106
track record, REIT screening tool,
136–137
Manufactured housing REITs, 75–76,
75t, 191t
Market capitalizations, 7, 106
Market rent, 47, 206
Marking-to-market, 24
Medical office buildings (MOBs), 60, 61
Mezzanine lenders, impact, 41
Modified gross lease, 50–51, 206
Morgan Stanley Composite Index (MSCI)
indices, 16
US REIT Index (RMZ/RMS), 206
Mortgage-backed securities (MBS), cash
flows (alteration), 70
Mortgage REITs (mREITs), 6–7, 66–70,
188t–189t
investing, basics, 69
ranking, 67t–68t
residential/commercial mortgage market
focus, 69
risks/rewards, 69–70
Multi-tenanted building, square footage
measurements, 47
N
National Association of Real Estate
Investment Trusts (NAREIT),
3, 206
classification, usage, 56
NAREIT-defined FFO, adjustment, 139t
National Association of Securities Dealers
Automated Quotation (NASDAQ)
System, REIT listing/performance, 4,
109f
Net absorption, 206
Net asset value/valuation (NAV), 149–151,
207
calculation, 151–159
NAV per share, calculation, 151t
REIT average premium (discount) to
NAV, 150f
stock price, relationship, 149
213
Net book value, 37
Net lease, 50, 207
Net operating income (NOI), 134, 207
calculating, 134t
cash NOI, 151–153
historical same-store NOI growth rates,
155t
run-rate cash NOI, 153
Net rent, 47
New equity
supply, REIT performance (contrast),
101f
New York Stock Exchange (NYSE), publicly
traded REIT listing, 4
95 percent Income Test (REIT rule), 97
Nonrecurring capex, 202
Nontaxable capital returns, 36
Nontraded REITs (NTRs)
costs/fees, 95
structures, 93t–94t
O
Occupancy rate, 64
Office REITs, 70–73, 189t–190t
lease terms, 72
performance, 121–122
ranking, 71t
risks/rewards, 72–73
Operating expenses, 45
Operating metrics, 134–137
Operating partnership (OP), 88
Operating Partnership (OP) unit, 8, 88–90,
151, 207
estate planning, 90
exclusion, 4, 6
Operating portfolio, 138
Ordinary dividends, 36
Organic growth, 12, 134
P
Patient Protection and Affordable Care Act
(ACA) (Obamacare), 61
Payout ratios, 147–148
Percentage rents, 207
Personal marginal tax rates, 34
Per square foot (PSF) revenue,
generation, 77
Portfolio
allocations, 23f
diversification, 21–23, 103, 208
in-service portfolio, 140
operating portfolio, 138
214
Index
Positive spread investing, 208
Power centers (retail REITs), 78–79
Preferred stock (share) dividends, 40
exclusion, 137–138
NAREIT-defined FFO, adjustment,
139t
Preferred shareholders, dividend
payments, 40
Preferred shares, preferred stock callable
preferred shares, redemption, 149
face value (par value), 40
liquidation value, 141
ownership risk, 40–42
Price/earnings (P/E) multiple (ratio),
145, 156
Price multiple-to-earnings growth (PEG)
ratios, 145–146
Private REITs, 92–95
structures, comparison, 93t–94t
Profitability metrics, 137–140
Properties, acquisition/development/
sale, 12
Property cycle, 208, 115f
demand, oversupply/absence, 115–116
expansion, 115
impact, 114–117
phases of, 115–116
recession, 116
recovery, 115
supply-and-demand equilibrium, 115
Property-level debt, 6
Property types
classification (REITs), 7, 55
historical same-store NOI growth rates,
155t
lease length/stock beta, 162t
riskiness, 124f
total returns, 119f
Protecting Americans from Tax Hikes Act of
2015 (PATH), impact, 107
Publicly traded REITs, 3, 92–95
real estate returns, addition, 20–21
Public nonlisted REITs (PNLRs), 92–95
Public REIT structures, comparison,
93t–94t
Q
Qualified dividends, REIT dividends
(contrast), 39
Quantitative easing (QE), 129–130
Quarterly run rate (for NOI), 151–155
R
Real estate
demand, economic drivers, 120t
fundamentals, REIT performance
(relationship), 113–114
mutual fund, creation, 15
performance, lag, 122
Real estate-dedicated mutual funds,
102f, 105
Real Estate Investment Trust Act of 1960,
3, 208
Real estate investment trusts (REITs), 27,
208
analysis, 133
annual income requirements, 97
average premium (discount) to NAV, 150f
balance sheet metrics/analysis, 140–145
categories, 4
common dividend, components, 36–39
common stock issuance/growth, 111f
companies, listing, 167–174
company-specific websites, usage, 15
corporate governance, 92
corporate structures, transparency, 25–26
credit ratings, 196–200
cutter REITs, 127
data center REITs, 57t
defensive property types, demand
(steadiness), 118–123
defining, 3
demand, increase, 106–108
development, 13–14
distribution requirements, 96
diversified REITs, 55–56
downREITs, 91
earnings growth, 135–136
efficiency, impact, 118
equity market capitalization (EMC), 141
equity REITs, 4–6
externally advised/managed REITs,
95–96
financial crisis (2007–2008), impact,
111–112
financial health, assessment, 141
Financial Times Stock Exchange (FTSE)
NAREIT All REITs Index, 15
geographic concentration, risks/rewards,
12
geographic focus, 9, 12
growth stocks, contrast, 108–109
growth strategy, 12–14
health-care REITs, 59–62
Index
historical total returns, 99–101, 117t
hotel REITs, 64, 66
hybrid REITs, 7
index inclusion, 7–9
industrial REITs, 62–63
industry, 4, 5t
information, discovery, 15–17
infrastructure REITs, 58t
investment, 17, 19, 108–112
keeper REITs, 127
leverage, 140–141
limited partnerships (LPs), 98, 98t
liquidity, 20–21
location, impact, 118
lodging/resort REITs, 63–66
long-term investor opportunities,
129–130
manufactured housing REITs, 75–76
money manager discovery, 105
mortgage REITs, 6–7, 66–70
net operating metrics (NOI), 134
office REITs, 70–73
operating metrics, 134–137
ordinary dividend income, 36
PATH Act, impact, 107
PEG ratio, calculation, 146
portfolio diversification, 21–23
preferred shares, ownership risk,
40–42
preferred stock dividends, 40
private REITs, 92–95
profitability metrics, 137–140
property type, 7, 55
publicly traded REITs, 92–95
public nonlisted REITs, 92–95
qualification requirements, 96–97
qualifying, 96–98
quarterly investment requirements, 97
residential REITs, 73–76
resources, 164–165
retail REITs, 77–81
returns, impact, 128f
same-store (organic) earnings,
134–135
sectors, examination, 183
self-storage REITS, 82–83
shares, demand, 101–108
shares, trading volatility, 123
single-family-home REITs, 76
size (market capitalization), 7–9
S&P 400 Mid Cap Index constituents,
10t
215
S&P 500 Index constituents, 9t
S&P 600 Small Cap Index constituents,
11t
specialized REITs, 55–56
specialty REITs, 57t
stock, 52–53, 146
structures, 87, 88f, 105–106
taxation, 34, 35
ticker symbol listing, 175–181
timber REITs, 58t
total returns, 5t, 19, 100t
transparency, 92
treasury yields, contrast, 109–110
triple-net-leases, usage, 56–59
umbrella partnership REITs (UPREITs),
88
underperformance, credit crisis
(impact), 112
usage, 23–25, 162–163
valuation metrics, 145–159
volatility, liquidity (contrast), 92
weighted average cost of capital (WACC),
128–129
yields, 27–30, 28f
Real estate investment trusts (REITs),
dividends, 20, 27, 34
Bush tax cuts, impact, 39
cash payments, 35–36
cuts, 30
monthly U.S. payments, 29t
ordinary income taxation, rarity, 36
taxes, calculations (sample), 38t
Real estate investment trusts (REITs),
performance, 99
company attributes, impact, 113–126
economic cycle, impact, 114–117
interest rate environment, relationship,
129–130
NASDAQ, contrast, 109f
new equity supply, contrast, 101f
property cycle, impact, 114–117
property type classification, 116
real estate fundamentals, relationship,
113–114
S&P 500, contrast, 109f
tracking, indexes (usage), 15–17
weighted average cost of capital (WACC),
relationship, 127–129
Real estate investment trusts (REITs),
returns
capital formation, 104–105
CMBS spreads, contrast, 112f
216
Index
Real estate investment trusts (REITs),
returns (continued)
lease length/structure, impact (process),
122–123
prediction, complication, 163
Real estate limited partnerships (RELPs),
98, 105
Real Estate sector (GICS creation), 108, 129
Real property, limited partnership unit
contribution (IRS perspective), 90
Recession (property cycle phase), 116
Recession, onset, 121
Recovery (property cycle phase), 115
Recurring capex, 202
REIT Modernization Act of 1999 (RMA), 6,
106, 136
REIT Simplification Act of 1994, 106,
206
Rent, 46–47
base rent, 46
contract rent, 46
effective rent, 47
free rent, 47
gross rent, 46
market rent, 47
net rent, 47
percentage rents, 207
roll-down, 122
straight-lining, example, 153
total rent, 46
types, comparison, 46t
Rentable square feet, 47
Rental income, REIT straight-lining, 153
Research and development (R&D), 62, 208
Residential mortgage-backed securities
(RMBS), 66, 68, 69
Residential mortgage markets, mortgage
REIT focus, 69
Residential REITs, 73–76
apartment REITs, 73–75
manufactured housing REITs, 75–76
single-family-home REITs, 76
Resolution Trust Corporation (RTC),
creation, 104
Retail REITs, 77–81
freestanding retail REITs, 80–81
mall REITs, 79–80
risks/rewards, 81
shopping center REITs, 77–79
Revenue per available room (RevPAR),
64, 207
Risk-free rate, 149
Risk-on trade, 109
Run-rate cash NOI, 153
S
Same-store (organic) earnings, 134–135
Same-store growth, adjustment/assumption,
155
Same-store NOI growth rates, 155t
Savings and loan (S&L) crisis, buying
opportunity, 104
Second-generation space, TIs (usage), 48
Securities and Exchange Commission
(SEC), 52, 133, 207
Self-storage REITS, 82–83, 193t
performance, 121
ranking, 82t
risks/rewards, 82–83
Senior debt, 6
75 percent Income Test (REIT rule), 97
Shareholders
cost basis, 39
dividend payments, 40
management, alignment, 105–106
Shopping center REITs, 77–79, 192t
outperformance, 121
ranking, 78t
Short-term leases, volatility (increase), 125
Single-family-home REITs, 76, 76t, 192t
Specialized/specialty REITs, 7, 55–56, 57t,
184t
Square feet, 47
gross square feet (gross building
area), 47
measurements, 47
rentable square feet, 47
useable square feet (useable area), 47
Standard & Poor’s 400 Mid Cap Index, REIT
constituents, 10t
Standard & Poor’s 500 Index, 24
REIT constituents, 9t
REIT performance, contrast, 109f
Standard & Poor’s 600 Small Cap Index,
REIT constituents, 11t
Standard & Poor’s Dow Jones Indices LLC,
16–17
Standard & Poor’s GSCI Total Index, 24
Step-ups (rent bumps), 72
Stocks
beta, property type, 162t
cost basis, 146
fair stock price, calculation, 148
indexes, inclusion (impact), 106
Index
preferred stock dividends, 40
stock price performance, 52–53
Straight-lined rent, 153, 207
Sucker yield, 30
Supply-and-demand equilibrium (property
cycle phase), 115
T
Taxable REIT subsidiary (TRS), 97, 106,
136, 152, 207
Tax Reform Act of 1986, 105, 207
Tenant improvement (TI), 47–48
Tenants
anchor tenants, space (leasing), 80
bankruptcy, leases (relationship), 51–53
landlord services, provision, 105
Timber REITs, 58, 185t
Total asset value, 97
Total debt outstanding, 141
Total market capitalization, 207
Total rent, 46
Total returns, 5t, 19, 24, 66, 96, 99, 104, 106,
108, 111–113
comparative compounded total annual
returns, 20t
double-digit total returns, 19
rolling periods, 25t
Transparency, 25–26, 92, 208
Treasury Inflation Protected Securities
(TIPS), 24, 208
Treasury yields, REITs (contrast), 109–110
Triple-net-leases, 52, 207
long-term leases, usage, 118
long-term triple-net leases, usage, 61–62,
81
usage, 56–59
U
Umbrella Partnership REITs (UPREITs), 88,
89f, 208
Undepreciated book value, 97
217
Unsecured debt, 6
U.S. defined benefit pension plan
performance (CEM benchmarking
study), 24f
Useable square feet (useable area), 47
U.S. GDP, hotel REIT performance
(contrast), 126t
U.S. REITs, 29t, 130t
U.S. Treasury bond rate (risk-free
rate), 149
V
Vacancy
impact, 135
rates, increase, 114
Valuation metrics, 145–159
Vanguard Group, REIT ETF (VNQ), 17
Volatility, 21
levels, increase, 125
liquidity, contrast, 92
risk, 123
W
Weighted average cost of capital (WACC),
143–145
calculation, 143
competitive advantage/disadvantage,
127–129
REIT performance, relationship,
127–129
Wilshire Report (2016), 22
Y
Yield on cost, 28
calculation, 146
Yields
contrast, 28f
current yield, calculation, 146
dividend yield, 146–147
safety, 30, 110
sucker yield, 30
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